The withdrawal of the UK from the EU is the primary area of concern for both regulators at present, with the focus for the FCA being on ensuring stability across the financial sectors post-Brexit through monitoring change and ensuring that the UK maintains its status as key figure in setting international regulatory standards.
Culture and governance continues to be at the forefront of consideration for the conduct regulator. In December this year the extension of SM&CR will conclude, with approximately 50,000 additional firms falling into the regime. Additionally we will see focus on promoting a “healthy” culture within firms and further work on ensuring that remuneration structures work to drive the right behaviours and fair outcomes for consumers.
There remains an emphasis on operational resilience, to ensure firms have appropriate controls to responsibly manage operations outsourced to third-party service providers and that firms have adequate mechanisms for change management (for example when upgrading IT systems). This year there will be more attention on how firms protect against cyber-attacks including the testing of systems using the CBEST intelligence based penetration testing methodology, which was pioneered by the Bank of England and is globally recognised.
In respect of more general financial crime, the FCA will seek to identify the types of fraud affecting different sectors and will continue to raise awareness of concerns in this regard through its ScamSmart initiative. Where anti-money Laundering (AML) is of concern, the regulator is motivated to improve detection through the use of intelligence gathering, data analytics and new technologies, using these tools to benchmark firm’s internal controls.
Within the next few months we will see the finalisation of changes to responsible lending rules that will help free “mortgage prisoners” and allow them to refinance to cheaper mortgage products. There will be a focus on fair pricing and product value across the general insurance sector also. These efforts seek to ensure the fair treatment of existing customers, who will also benefit from a possible upheaval of the cash savings market, which currently only tends to favour those customers that shop for the best rate. There is potential with this market for the FCA to introduce a basic savings rate or possibly extend the Open Banking initiative to also cover savings accounts.
There is a great deal of potential in the concept of “Open Finance”. The desire to develop this framework and adapt across different sectors is strong enough to warrant the FCA holding a cross-sector event to raise awareness. In doing so they hope to encourage innovation and foster data aggregation across markets.
To help gain and build confidence in the rise of algorithmic decision-making, the FCA seeks to investigate and identify whether such data-driven decision engines are able to promote a compliant and ethical use of data, leading to fair customer outcomes. There is a clear commitment to issue perimeter guidance in respect of the risks associated with cryptoassets and to continue to encourage innovation in the FinTech space. The FCA is also keen to embrace RegTech further, and will move forward with data exchange, technologies to improve AML and financial crime compliance and to drive better outcomes for vulnerable customers.
The FCA’s drive to embrace technological solutions is also apparent and the future of regulation has been highlighted as a priority. This includes looking at machine readable and executable versions of the Handbook and to help firms reduce the cost of compliance by utilising technology. Further future-gazing initiatives include annual statements on perimeter issues to help clarify and engage on these matters as well a statement in respect of the Duty of Care Discussion Paper. This discussion paper was issued last year with the aim of helping the FCA discharge its duties more effectively.
Intergenerational differences features in the business plan once again, but this year the regulator will concentrate on broader exercise across sectors looking at generational cohorts and changing needs. The Financial Lives Survey will take place again in 2019 after a two-year gap. This provides the FCA with a wealth of consumer information and helps identify indicators of potential harm. We should also expect to see the publication of more detailed guidance and standards in relation to best practice for the treatment of vulnerable customers.
What are the implications for banks and lenders?
The FCA will shine a light on a number of issues across both the wholesale and retail lending markets.
Within Wholesale Financial Markets some of the key highlights for the coming year include:
- Managing the impact of withdrawing from the European Union.
- Monitoring of transitions away from LIBOR.
- Market abuse – centred on prevention measures (controlling inside information via frameworks), with the reporting of abuse in fixed income markets.
Focus areas for Retail and Consumer lenders over the next twelve months include:
- Affordability – with a particular focus on automated lending decisions.
- Mortgage ‘prisoners’ - the FCA are keen that retail mortgage customers should be able to compare different products and will seek to understand more on this by looking at populations that do not move mortgages.
- Rent-to-own and overdrafts - the continued theme of harm experienced by rent-to-own and overdraft customers will be addressed. Policy statements are expected for both, with pricing remedies (limits) the likely outcome.
- Open Banking and PSD2 – technical rules (PSD2) to be introduced in Q3 2019, and a focus on introducing Open Banking services safely and securely across 2019 and 2020.
- Thematic reviews to understand whether certain retail lending models rely on customers being unable to meet repayments.
What are the implications for investment managers?
The FCA reports that the investment management sector continues to be impacted by low interest rates and a shift towards passive investing. Key activities for the next twelve months include:
- A focus on the implementation of the new fund governance requirements and rules around information provided to investors, due to come into effect in October 2019.
- Consultation on the implementation of any recommendations arising from the CMA’s inquiry into investment consultancy and fiduciary management services due to take effect by the end of 2019.
- Implementation of The Revised Shareholder Rights Directive (SRD II) in the UK.
- Consultation on the introduction of a new prudential regime for MiFID investment firms. The paper is due in the second half of 2019 and the regime is expected to be aligned to the EU Investment Firms Directive and Regulation, due to be implemented in 2020/21.
- A policy statement and final rules on liquidity management in firms. This is due to be published in the first half of 2019.
- An evaluation of the Packaged Retail and Insurance-based Investment Products Regulation as part of the planned MiFID implementation review.
If you wish to discuss any of these themes, your plan for the year ahead or how we can help, please get in touch.