FCA signals that it aims to take a tougher stance.
The FCA published its Business Plan for 2021/22 on 15 July 2021. The Plan, and accompanying remarks made by Nikhil Rathi, FCA CEO, suggest that the FCA intends to take a more assertive and proactive approach in future.
While many of the policy objectives set out in the Business Plan will be familiar to firms, the FCA’s new ethos may not be. The FCA vows to be more innovative, assertive, and adaptive: the second of which may cause concern for firms.
Mr. Rathi speaks of a regulator that is “tough, assertive, confident, decisive, agile” and of a culture that embraces risk and acts decisively. He also indicates that the FCA will be prepared to “test our powers to the limit”, and that the FCA will not be afraid to take action, even if it may not always win. Mr. Rathi comments that not winning a case “will not be seen as failure” and emphasises that when the FCA’s perception of risk has prevented necessary action in the past, the lack of action was more problematic than any potential consequences of such action.
These statements echo recently-published FCA board minutes from earlier this year, in which the board noted that the regulator’s willingness to take legal risk is entirely appropriate, especially in situations in which the law is unclear. The minutes report that the board supported proposals to recalibrate the degree of legal risk the FCA is willing to take.
Particular areas in which Mr. Rathi suggests that the FCA’s assertiveness will be brought to bear include in relation to authorisations and new business. The regulator has recruited new authorisations staff and plans for greater focus on examining applicants’ financials and business models. The FCA will apply more scrutiny when a business is seeking authorisation in a complex area or for high-risk business (the FCA offers cryptoasset firms as an example). The FCA highlights that this approach will capture not only new firms, but also firms within the temporary permissions regime that are seeking permanent UK authorisation. Such firms will be subject to an intensive assessment before the FCA grants authorisation. The FCA acknowledges that this may lead to some contentious outcomes.
The FCA has also set itself specific metrics relating to refusal, withdrawal, and rejection rates for authorisations, and for increasing the number of firms whose permissions are removed either permanently or temporarily under its “use it or lose it” campaign.
Further, the FCA plans to scrutinise more closely newly authorised firms undertaking novel types of business. It will create a “Regulatory Nursery” to check that such firms are complying with the rules and identify potential harm early. The FCA also hopes to obtain strong oversight of firms with significant and fast-paced growth.
The FCA explains plans to consult on changing the balance of power between its managers and the independent Regulatory Decisions Committee (which is the final decision-maker on contested enforcement, supervisory, and authorisation cases) in favour of the FCA, so that it can intervene more quickly.
In terms of general supervision, the FCA warns that firms should expect greater rigour on upholding high standards. The FCA highlights governance, conflicts of interest, and conduct as particular areas of focus, including considering diversity and inclusion as regulatory issues (following the recent Discussion Paper on this topic).
Another area of focus for the regulator is the financial promotions regime. Mr. Rathi highlights how the regime for sophisticated investors is very liberal and questions whether it needs to be tightened up. This reflects his recent comments in a letter to the government’s Work and Pensions Committee, in which he stated, “We also believe that the exemptions in the Financial Promotion Order for High Net Worth (HNW) and Sophisticated investors are a significant vulnerability in the financial promotion regime … We believe both the ability to self-certify qualification for the exemptions, and the thresholds in the exemptions, need to be addressed”. Although the FCA cannot change the exemptions itself, the regulator is clearly pressing government to amend the relevant legislation. Firms that frequently rely on these exemptions should consider the impact of a potential change.
Firms should take note of the FCA’s new philosophy, and expect a stricter regulator going forwards.