UK financial regulator business plan: key takeaways and potential enforcement focus

August 24, 2021 – The UK Financial Conduct Authority (FCA) has published its business plan for 2021/2022. The FCA is the UK’s main financial regulator with responsibility for protecting consumers, supporting competition in financial services and maintaining market integrity.

The business plan sets out the regulator’s priorities for the coming financial year (and beyond) and is therefore an important pointer to the FCA’s future priorities and direction. This year’s plan follows a year in which the regulator has been focused on dealing with the immediate consequences for financial services of the COVID-19 pandemic (notably by bringing its business interruption insurance test case).

The FCA, like financial regulators around the world, has increased its focus on sustainability and ESG — particularly climate change, given the central role of financial services firms in the allocation of capital as well as the prudential risks climate change poses. This year’s business plan signals a continued shift from ESG governance, controls and disclosures being a ‘nice to have’ to a hard regulatory expectation.

For example, the FCA highlights that in January 2021 it introduced a new Listing Rule following recommendations by the Task Force on Climate-Related Financial Disclosures, an organization set up by the Financial Stability Board in 2015 to improve reporting of climate-related financial information. The new rule requires firms with a premium UK listing to, amongst other things, disclose in their annual financial report the climate-related risks and opportunities that the relevant organization has identified over the short, medium and long term.

The FCA confirms in the business plan that it is consulting on extending these new disclosure rules to asset managers, life insurers and FCA-regulated pension schemes, and that it aims to bring new rules into force from Jan. 1, 2022.

Furthermore, the regulator will increase its supervisory focus on whether asset managers market the ESG properties of funds in terms that are fair, clear and not misleading. ESG and sustainable investment funds are currently the fastest-growing segment of the European funds market and consumers are placing significant value on ESG-related investment opportunities.

The business plan sits alongside guidance issued to the chairs of authorized fund managers, published on 19 July 2021, which set out the FCA’s expectations on the design, delivery and disclosure of ESG and sustainable investment funds. The overarching principle in the guidance is that a fund’s ESG and/or sustainability focus should be reflected consistently in its design, delivery and disclosure (including its name, stated objectives, documented investment policy and strategy and its holdings). This is part of a wider FCA focus on ensuring that asset managers market investment products in ways that are fair, clear and not misleading.

The FCA will increasingly challenge firms at the authorization gateway, and on an ongoing basis, to help ensure that firms provide consumers and the market with accurate and thoughtful information about ESG products, services and strategies. In its guidance, the regulator highlighted recent applications for authorization which had fallen below its expectations, including a fund allegedly marketing itself as investing in companies described as “contributing to positive environmental impact,” where it was not obvious that any of the companies in question were in fact doing so. We are already seeing that the increased expectations of investors and regulators in this space are prompting a rise in ESG-related litigation and we expect this trend to continue.

The FCA also aims to improve the diversity and inclusion of its own workforce as well as of the financial services sector generally. It highlights a recent discussion paper, prepared jointly with the Bank of England, in which the regulators set out their plans to accelerate the pace of meaningful change on diversity and inclusion in the financial sector as a whole. They intend to roll out a voluntary pilot data survey later this year in which they will ask firms to supply aggregate data on some or all of the nine protected characteristics under the Equality Act 2010 (including race and gender), as well as socio-economic background, for their entire workforce (and not just for the most senior employees). The proposals are for all firms to eventually be required to submit this kind of data (reporting is currently largely voluntary) albeit on a proportional basis.

While the FCA’s focus on vulnerable customers is longstanding (and underpinned by its statutory objective of consumer protection), the issue has come into sharper focus with the ongoing pandemic and its impact on household finances. The business plan puts consumer protection front and center.

At a high level, the plan signals a more aggressive and assertive approach to firms’ misconduct, with the regulator noting that it intends to create a more robust authorization gateway for new firms, ensure stronger oversight for newly authorized firms, and use innovative, data-driven approaches to prevent and stop misconduct (for example, social media monitoring to find and raise awareness about new types of investment scams).

In terms of its specific program of work, the regulator continues to consult on proposals for a new Consumer Duty, which would require firms in retail markets to ask themselves what outcome their customers
should be able to expect from their products and services, and to act to enable rather than hinder those outcomes.

The proposed changes could, for example, require firms to facilitate consumers’ understanding of financial information given to them, actively anticipating where consumers may misunderstand and structuring information in a way that prevents exploitation of behavioral biases. In its consultation, the FCA raised the example of banks issuing communications that encouraged consumers to focus on the daily cost of an overdraft (which appeared small) rather than the significant cumulative cost of borrowing. In the regulator’s view, such communications were structured in a way that exploited consumers’ bias towards short-term thinking, preventing them from making a rational and fully informed decision. The FCA intends for the Consumer Duty to put an end to such practices, and it is clear that the regulator views the Duty as potentially a key pillar in its enforcement strategy going forward.

The past year has seen a proliferation of regulatory guidelines and requirements relating to operational resilience and outsourcing. In March 2021, the FCA published its long-awaited operational resilience Policy Statement. It sets out several far-reaching requirements, including, for example, an emphasis on ‘impact tolerances’ (the maximum tolerable amount of disruption to an important business service), requiring the use of mapping exercises to prepare ‘impact tolerances’ for important business services, and the testing of such ‘impact tolerances’ through disruption scenarios.

The FCA confirms in the business plan that it expects firms to implement these requirements, that it will, during 2021/2022, assess firms’ progress in implementing these new requirements and identify areas for improvement, and that it will, from 31 March 2022 to 31 March 2025, assess firms’ ability to remain within their ‘impact tolerances’. Following a brief hiatus during which it was largely focused on the financial impacts of the pandemic, we expect the FCA to re-engage with operational resilience as a priority area in the coming years.

Given the priorities set by the FCA, we consider that there are several areas on which the FCA is likely to target its thematic supervisory and enforcement activities in the coming years:

•First, as noted, the regulator will be monitoring closely whether firms are properly implementing its operational resilience requirements.

•Second, we expect the regulator to look to use some of the new tools that will be at its disposal (for example, the new Consumer Duty and strengthened financial promotions rules) to attack practices that it regards as harming consumers such as misleading marketing (including in relation to ESG-related products) or exploiting consumers’ behavioral biases.

•Third, with respect to the wholesale market, we expect the regulator to increase enforcement activity against misconduct that disrupts the market.

With this business plan, the FCA has signaled its intention to adopt a more assertive and interventionist role in financial services markets, and firms should expect increased regulatory intrusion and challenge in the FCA’s focus areas.