The UK Financial Conduct Authority (CIF) and Prudential Regulation Authority (ARP) have recently published their business plans for 2022/23. The FCA has also published a three-year strategy. But what does this really mean for businesses?
This is the first in a series of blog posts looking behind the headlines to understand the broader points of regulation. We will look at how businesses can adapt to keep pace with the latest FCA and PRA ambitions and the rapidly changing regulatory landscape.
FCA sees new risks and new opportunities (but mostly risks)
The FCA’s plan is to “proactively shape the digitalization of financial services”. This ambition aligns with the UK Government’s plan to create and nurture a proactive and competitive regime for digital markets.
For example, the FCA will contribute to the development of cryptography policies. This will include initiatives such as legislative amendments tracked in the UK Treasury’s recent response to its consultation on the UK regulatory approach to crypto-assets, stablecoins and distributed ledger technology (DLT). The FCA will consult on the regulatory regime for stablecoins later this year and clearly considers that additional crypto regulation will be necessary.
Before the FCA can realize this ambition, it believes it needs to better understand the emerging risks and opportunities. However, reading the latest business plan and strategy, the FCA seems to be much more concerned with the risks than the opportunities. The PRA also seems concerned, promising to monitor developments in key products and the emergence of new banking models of which payments are an essential component.
For example, the FCA will proactively identify the competition risk and benefits of Big Tech entering financial services. This is also of concern to the PRA, in particular with regard to systemic risks stemming from concentrations of third-party service provision to companies, created by the increased digitization of financial services.
In line with this concern, the FCA said it would begin to “thoroughly investigate” consumers’ digital journeys. This aligns with much of the FCA’s comments regarding the introduction of the new Consumer Duty, the final rules of which are expected in a few months. In particular, FCA wants to see a reduction in “mud” practices and other harmful design features.
Companies should seek to align themselves with regulators’ proactive approach to identifying both new opportunities and new risks. This expectation is already apparent in regulatory communications and should not be overlooked. For example, the FCA’s recent custody and fund portfolio strategy letter references the importance of companies considering new technologies, including DLT, in the context of their CASS responsibilities. Meanwhile, the PRA plans to ask companies to report their crypto-asset exposures, treatments and future investment plans.
Challenge of improving regulator skills
Like any great organization, FCA must realize its ambition through its people. As digital markets evolve and new risks materialize, there is also the challenge of developing FCA’s workforce. To achieve this, the FCA is recruiting more staff dedicated to enforcing threshold conditions and weeding out “problem companies”.
The FCA considers that the main causes of consumer harm are online. Therefore, he developed a new team of specialists to oversee companies whose business is mainly online products. He also set up a new early monitoring team. Companies that manage to squeeze through the permissions gateway and are new to financial services can expect to receive enhanced oversight from this new team.
But recruiting more staff will not necessarily bring the same benefits as developing the workforce. The FCA’s stance that companies are responsible for assessing the risks to their business and their consumers if they interact with or are exposed to crypto-assets, and recent enforcement rulings, do nothing to dispel sentiment that large corporations are expected to bridge the skills gap and share the risk to “regulate” new and emerging risks.
Influencers, marketing and financial promotions
FCA’s approach to digital markets is well exemplified in the area of financial promotions and marketing.
Together with HM Treasury, the FCA plans to strengthen the financial promotions regime, with particular emphasis on the digital customer journey for high-risk investments. The final rules are expected this summer.
At the same time, the Authority is increasing its means dedicated to intervening in non-compliant financial promotions by approved companies. This includes improving its ability to identify, alert and request platforms to remove unauthorized promotions, associated websites and social media accounts.
The regulator promises to take swift and forceful action and hopes to see an increase in FCA interventions over the next two years. There’s even a suggestion that the FCA could be working on automated interventions, perhaps linking them to its web scraping monitoring.
The FCA and the PRA are aware of and concerned about the new risks arising from the digitalisation of financial services. Companies should be aware of these concerns and prepared to explain how they monitor and mitigate these risks. For example:
- analyze consumer digital journeys and associated conduct and compliance risks;
- maintain a proactive and open regulatory dialogue;
- considering your company’s risk appetite framework in light of emerging digital products and services; and
- for new entrants, early seeking expert advice on the authorization process.