For those of you who came to the conference and then followed up with a visit to one of our business development events, you will have heard of the changes that the regulator is bringing in over the next 12 months. These are changes it feels will strengthen the relationship between good quality advisers and their customers, and prevent harm caused by firms who don’t have good customer outcomes at the heart of their business.
There were undoubtedly going to be ramifications following the London & Capital Markets case, where customers lost money in investments in which they should never been allowed to invest, and for a firm like Connaught (which closed in 2012) but pursued its trade under the radar of the regulator.
The FCA has recognised that there are a number of things it could have done better in its supervision of these two firms and has taken steps to change to better protect consumers from harm. The FCA has highlighted past operational mistakes and learned considerable lessons from what happened with LCF and Connaught. Ultimately, consumers must have trust in financial services and this has led the regulator to make changes reinforcing a culture in which staff at the FCA are empowered and confident to take responsibility for bold interventions.
As Network Director, I know that the FCA will be making faster and more effective decisions, prioritising the right outcomes for consumers, markets and firms, and they will be reforming their approach to intelligence gathering and information sharing. Their continuing action plan, specifically on a wider transformation programme, seeks to do this.
This will mean that the network will be working closely with members to deliver its own regulatory infrastructure that adapts to the new environment in which we are working. In some areas, we will find that our systems and controls perform perfectly well to meet the challenges that the regulator has set us. In others, there will need to be change, as we have already seen with the impact of the Fair Pricing Paper issued in 2021 and the required changes in the home insurance sales process.
It is my role to ensure that we embed the regulator’s new requirements into our network with the minimum level of disruption to normal working days. We will adapt but keep delivering great customer outcomes by finding the right mortgage for the right customer and explaining in clear terminology, the benefits and risks associated with owning a home or investment property.
However, I do ask you to keep an open mind to change, especially when it is driven by regulatory guidance. We know that there will be occasions when a request for change is questioned, but there will be a wider implication that should be for the benefit of you and your customer. Whether it’s the fact that some firms in our industry will not be able to adapt to the new environment leaving more demand for your services, or that customers are encouraged by the FCA to engage in insurance conversations – something that may have not been on a customer’s radar. Change often brings with it opportunity.
In the next few pages, I’ve tried to summarise what is currently in train from the regulator. How it affects us as a network and you as a firm principal or adviser will evolve over time, but I hope that you will look at the journey positively as we all continue to put customers first.
The regulator has published its business plan for 2022 and in it recognises the need for change. A pandemic, Brexit, increasing digitisation and the need to address climate change are transforming the financial services landscape and with it, the FCA is becoming a different organisation, challenging itself to be a forward thinking, proactive regulator.
The FCA has challenged itself to be:
- More innovative by taking advantage of data to increase their ability to protect consumers from financial harm
- More assertive in testing the limits of their powers
- More adaptive by constantly learning and adapting their approach to regulation.
With these challenges comes the FCA Business Plan, with a focus on improving overall market outcomes in financial services, enabling competition and allowing innovation to prosper, whilst preventing serious misconduct that leads to harm.
A fundamental role in society
According to the FCA, almost nine out of ten (88%) adults held at least one insurance product. The value of all residential mortgage loans was £1.6 Billion at the end of Q1 2021 and between March and October 2020, one in six mortgage holders admitted to a mortgage payment deferral, with 40% of them telling the FCA that they would have struggled financially without it. The FCA suggests it has a profound influence on society in general, and its business plan underpins this belief.
For authorised firms, visibility of good customer outcomes will be paramount as the FCA challenges us all to meet the standards and rules set out. The FCA has already taken steps to look at firms holistically and they are currently undergoing a “use it or lose it” exercise, piloting the removal of firms’ permissions where they aren’t carrying out regulated activities. This is to limit the “halo effect” of regulation where firms use the authority of the FCA to make unregulated activities seem more trustworthy. There will be greater focus on firms’ business plans, stronger oversight and the need to demonstrate a smart compliance culture, combined with sound governance and operational resilience.
Over the next 12 months the FCA will be investing in its data gathering capabilities, building automation and efficiency of oversight, and using advanced analytical techniques to proactively identify firms or harms for investigation.
The Mortgage Market
More specific to the mortgage market, the FCA believes that consumers should be able to access affordable products and make informed decisions to meet their borrowing needs. Firms will need to evidence that they are treating customers fairly including if they fall into financial difficulty, and compete and innovate to support good customer outcomes and prevent poor practices.
The FCA will be looking at the four following outcomes to measure success: –
- Affordable credit is available to consumers to smooth their consumption
- Consumers do not become over-indebted with credit that they cannot afford
- Consumers can find products that meet their needs
- Consumers can take control of their debt at an early stage when they fall into financial difficulty.
The evidence of success will be the levels of complaints received by firms operating in the consumer credit market.
Key Regulatory Changes in the next 12 months
The plan that the FCA has set itself is far reaching and will impact everyone in the financial services industry. Much of the work will focus on the Investment Industry, but there are several cross-sector initiatives that will drive change and cultural shift.
The FCA will be implementing a new financial promotions regime with the ultimate aim of providing consumers with clear information that helps them make effective choices and be in a position to take responsibility for those choices.
To help consumers make decisions on who they work with, the FCA will be publishing more data about firms that help inform consumers and influence firms’ conduct. This includes regulatory data that they have not shared before, including FOS complaint and uphold rates.
The FCA is reviewing its approach to debt advice rules. Recent supervision work found significant problems with the advice given by a sample of firms that package debt, creating a risk of serious consumer harm.
Buy now Pay later
There will be new rules in the Buy Now Pay Later sector (now referred to as Deferred Payment Credit) bringing this borrowing into regulation. Consultation will start in 2022.
Pre-paid Funeral Plans
Pre-Paid Funeral Plans will become a regulated activity with commission payments being banned.
The FCA will restart its credit market information study to understand whether Credit Reference Agencies can provide the coverage and quality of credit information that lenders need. There is an interim report due in Q1 2022.
General Insurance product governance came into force in October 2021 with pricing and automatic renewal remedies following in January 2022. These measures are designed to ensure firms deliver fair value in home and motor insurance markets. New data reports are being used to measure success, track market changes and identify firms that continue to engage in “price walking.”
Consumer Duty sets clearer and higher standards for firms’ culture and conduct requiring them to:
- Ask themselves what outcomes their customers should be able to expect from their products and services
- Act to enable rather than hinder those outcomes
- Assess the effectiveness of their actions
This means firms being able to prove that they place their customers’ interests at the heart of their business. Efficient and effective communications mean consumers can make effective decisions for themselves on products and services that are specifically designed to meet their needs. Any barriers to the benefits of products or services available to the customer need to be removed and where there is a cost, it needs to be good value for money.
The Consumer Duty consultation closed last year with the final rules being introduced before the end of July 2022.
In recent years, the FCA has seen increased problems in the Appointed Representatives regime in the general insurance market. This has manifested itself in increased problems from principals having poor due diligence and oversight of their ARs. The FCA has published its intention to carry out more targeted supervision in wholesale markets and then consult on cross-sector changes to improve and strengthen elements of the AR regime.
As an example, the FCA will be looking for more timely information on principals, their ARs, and to improve ongoing oversight and due diligence on current and prospective ARs. This work may result in more fundamental changes in the AR regime including legislative change.
Ultimately, the FCA wants principals and ARs who are competent, financially stable, and able to deliver fair outcomes for consumers either when selling products or providing advice.
Over the coming year, the FCA will continue to monitor the financial resilience of firms through its data driven monitoring, targeting interventions at firms which they feel are weak or where failure will cause material harm.
Diversity & Inclusion
The FCA have published a Regulatory Diversity and Inclusion Discussion Paper setting out its role in improving diversity and inclusion in financial services. The outcome is an industry that reflects the society that it serves, and which can serve the diverse needs of its consumers. The FCA takes diversity and inclusion seriously and expects regulated firms and market participants to do the same.
Over the coming year, the FCA will be publishing more guidance and expect to see regulated firms having a culture that fosters the diverse experiences and backgrounds of their staff. They will expect to see that products reflect the diverse needs of consumers, offer fair value and are delivered in a fair and accessible way.
Environmental, Social and Governance
Climate change is high on the regulator’s agenda with financial services playing a significant role in the transition to a low carbon economy. Amongst other sectors, the FCA is consulting with life insurers on new disclosure protocols, with new rules coming into force in 2022. Work continues to address “greenwashing” and clarify expectations through the supervisory and authorisations process. It is anticipated that a “Climate Adaptation Report” will be published shortly with further guidance throughout the year.
The FCA recognises the significant harm that fraud causes to consumers and business and has included fraud as one of its cross-market issues of focus. The volume and variety of fraudulent activity in the UK is increasing. Consequently, the FCA is using its authority and influence to work with partners to help drive down the incidence and impact of fraud. The FCA has identified that online search engines and social media platforms are playing an increasingly significant role in putting consumers at risk through adverts for financial platforms, hence the recent changes with Google.
The FCA is committed to working to disrupt scams that are advertised and promoted and will warn consumers of the risks by “stepping up” their existing campaigns such as its ScamSmart campaign, which provides information on how to avoid investment and pension scams.
The following initiatives are currently planned for 2022:
|Multi Sector||Climate Change disclosures||Final rules being published Q4 2021|
|Diversity in Financial Services||A Discussion Paper was delivered in July 2021. A consultation paper is due H1 2022 with a Policy Statement in H2 2022|
|Cross Cutting||Reviewing the AR Regime||FCA Policy Statement planned for Q2 2022|
|Future Regulatory Framework Review||Awaiting results of 2nd consultation|
|Transforming data collection building on Digital Regulatory Reporting||Transformation programme started in June 2021|
|Operational Resilience||In scope, firms have until 31st March 2022 to operationalise the framework.|
|Conduct||Consumer Duty||Second Consultation paper with draft rules and guidance Q3 2022. Policy Rules and final guidance Q1 2023|
|Money Laundering Regulation review along with supervisory regime||Treasury to publish report in June 2022|
|Regulatory gateway for approval of financial promotions.||Consultation due Q1 2022. Gateway to be open by March 2023|
|Changes to the FCA’s cancellation of authorisation process||Consultation closed Q4 2021.|
|Single Market Initiatives||Regulation of pre-paid funeral plans||July 2022 – FCA Regulation comes into force|
|Mortgage Switching Remedies for customers who do not switch||TBC|
|Regulation of Buy now Pay Later||FCA running consultation on the details of the regime|
|Credit Information Market Study Interim Report||Interim report due by end Q1 2022|
|Strong Customer Authentication (SCA)||Q1 2022 – implementation of SCA for e-Commerce.|
|GI Pricing Practices||January 2022 – Pricing Rules come into force|
2022 is clearly a year of change for the FCA, which will have an impact on all in the financial services industry. Fair Pricing and Consumer Duty will deliver fundamental changes to the way advisers interact with their customers, whilst the focus on the AR regime will mean greater transparency in financial and operational resilience. However, increased barriers to entry and enhanced due diligence on new entrants will mean those who hold authorisation from the FCA will be of even greater value in 2022 and beyond.