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The FCA's mission - what does the future hold for consumer credit?

Recently the Financial Conduct Authority (FCA) published a consultation paper entitled 'Our Future Mission', generating a discussion about the way in which pursues its statutory objectives in the future.

The mission statement communicates how the regulator views its current remit and how it intends to further its objectives, illustrated by examples of recent regulatory initiatives which have led to good consumer outcomes.

So what are the key objectives and what impact could they have for firms?

Chief Executive of the FCA, Andrew Bailey, provides a foreword to the mission statement in which he explains that the FCA has been challenged by a number of crises in recent times.  He singles out four, in particular, as 'conduct crises':

  • mis-selling of payment protection insurance;
  • Libor and FX manipulation;
  • the mis-sale of Interest Rate Hedging Products in wholesale markets; and
  • areas of financial crime involving breaches of sanctions and money laundering.

The mission statement includes a number of messages for firms about how the FCA intends to conduct itself in the future, with a particular emphasis on its increased commitment and willingness to explain its decisions.

Many of the themes explored are familiar territory, the importance of redress where consumer detriment is identified, the emphasis on senior management responsibility and good governance and the FCA's intolerance of 'bad apples' in the market. The message that firms don't operate in a 'zero failure' market also surfaces again; the FCA emphasising the importance of ensuring that departures from the market are orderly and customer impact minimised.

Impact of technology

Another familiar theme explored in the mission statement is the impact of technology on the financial services market.  The FCA acknowledges again that advances in technology can be a driver of good outcomes for both firms and consumers.  But it expresses concern about the way that technology is being used by some firms.  One such area of concern is the use of Big Data to target active and sophisticated customers with ever more attractive (and unprofitable) offers, leading to a greater level of cross-subsidisation by inert or less sophisticated customers.  Firms should expect this to feature more heavily on the FCA's agenda.

Competition

The competition objective is given more prominence, with a hint that this is still perceived to be a driver of desirable changes in certain circumstances. However the FCA makes clear that competition is by no means the 'silver bullet' for bad practice in the market and it delivers an equally strong message that where customers are less capable, or even vulnerable, more direct forms of regulatory intervention may be required.

Disclosure

Some twists on the FCA's usual messages are also detectable.  For example, the FCA acknowledges that greater disclosure and transparency by firms doesn't necessary lead to better decision-making by consumers, even going as far as suggesting that in some cases, 'less is more'.  The FCA's proposed solution to this problem is to 'intervene with alternatives', so expect the regulator to become more proactive in attempting to influence consumer decisions.

Unregulated activities

Some new areas of regulatory focus also emerge.  One of these is unregulated activities carried on by regulated firms. The FCA draws attention to the powers it has to intervene in these unregulated activities and the factors it will take into account when deciding when to do so. It also makes clear that regulated firms cannot be complacent about the conduct of their unregulated activities. 

For current approved persons that oversee unregulated areas of a regulated business (for example, Business-to-Business lending), the FCA's warning suggests that adopting different, less stringent (and potentially non-FCA compliant) processes and standards than are applied to regulated activities is now a riskier strategy.

For those intending to become approved persons, the FCA reiterated that previous indiscretions that are unrelated to financial services will be taken into consideration if they have potential to impact on an individual's fitness and propriety.

Senior Managers Certificate Regime

The FCA reminds firms that are subject to the Senior Managers and Certification Regime (SMCR) that it can hold the individuals subject to that regime to account for unregulated as well as regulated activities. This also serves as advance warning to all other regulated firms, who will be brought within the SMCR regime in 2018. 

Vulnerable customers

In other areas the FCA is not so forthcoming. In the context of vulnerable customers, it refers to 'giving… some consumer groups higher levels of protection than others'. It is not clear whether further rules are in the pipeline or not here – it remains a moving feast as the regulator acknowledges that even the definition of vulnerability can change.  It is clear, however, that vulnerability remains a key factor in regulatory decision making and that the FCA will continue to prioritise the protection of vulnerable customers.

Despite pressure from consumer organisations, the FCA reiterated its view that consumers' legal rights should not be extended by imposing a duty of care rule on regulated firms; a move which could have increased consumers' ability to take legal action against regulated firms based on rule and, in particular, principles breaches.

Consumer credit

The consumer credit sector is highlighted several times in the mission statement, suggesting that it remains a key priority of the FCA.   In particular, the FCA's intervention in the payday lending market and its on-going scrutiny and purge of the debt management sector are cited as examples of effective regulatory intervention.  While the FCA is keen to point out that it is not abandoning those vulnerable customers who are affected by the exit of a large number of firms in these sectors, it remains to be seen whether the voluntary sector to which the FCA is sending them has the resources and skills to deal with large volume of customers who will be coming their way.

The FCA ends with two key messages, which draw together themes running throughout the document.  Firstly, the FCA plans to work on improving its transparency through its communication with firms.  A welcome objective of this increased transparency is to provide greater clarity on the regulator's expectations of the firms it regulates.  Secondly, the FCA explains the ways in which it has been using technology for its own ends and how it will continue to explore new technologies that may improve its use of resource and tackle new and existing challenges such as combatting financial crime.

Firms have until 26 January 2017 to respond to the mission statement.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.


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