The final part in our FCA Priorities series focuses on the future of regulation and its interaction with wider social policy.
Unsurprisingly, the FCA highlights Brexit as a reason why it needs to review how it regulates financial services and ensure it keeps pace. However, the FCA has also said that it will look at issues of equivalence, future proofing its principles and rules, the duty of care, and how data and technology can support better regulation.
Speaking at the future of financial conduct regulation earlier this year, the FCA chief executive Andrew Bailey said that "history indicates that broad attitudes towards public interest regulation have changed". Prior to the financial crisis, regulators were seen as taking a lighter approach placing greater emphasis on private interests of firms. However, after the financial crash, we have seen a period of re-regulation, supported by both regulators and strong public forces demanding greater accountability.
As a public interest regulator, the FCA has responsibility for ensuring a degree of protection for consumers. Parliament has given the FCA a statutory objective to protect consumers but this must be balanced as the governing legislation also acknowledges consumers should take responsibility for their decisions.
On the issue of imposing a duty of care on firms, the FCA has stated it is committed to keeping its power and tools under review. The publication of the Duty of Care Discussion Paper in July 2018 was part of this commitment and enabled stakeholders to comment on whether the FCA can do more to reduce consumer harm or whether there are already sufficient protections in place. In response, the FCA published its feedback statement in April 2019. There were strongly held views on both sides, with one half of respondents suggesting a new duty of care would reduce harm. By creating a duty of care on firms, it would trigger a fundamental change within firms, requiring them to ask 'is this right' rather than require them to refer to specific rules. This could lead to the FCA taking action in new types of cases which are not currently captured by the existing approach. However, if a duty of care was introduced, it is unclear how it could be applied in practice and how it would be assessed. Firms would have to radically reconsider how they deal with customers in some instances.
From the responses, the FCA identified that action needs to be taken to strengthen and enhance principles. As part of considering the future of regulation, the FCA will review how they apply the regulatory framework and assess whether new or revised principles are necessary.
Technology and data feature more heavily in the 2019/2020 Business Plan than in previous years. The Chairman's foreword focuses on the development of technology and how this may impact both consumers and the regulator. The FCA recognises that technology and innovation have had an effect on the way financial services are delivered. Regulators risk not being sufficiently resourced or skilled to match the changing technology landscape; however there is opportunity for the FCA to be more innovative and enable firms to provide services at lower cost. Looking forward, the regulator wants to use technology to support better regulation. One of the ways that the FCA is looking to do this is to digitalise its Handbook and introduce digital regulatory reporting.
The FCA is giving greater attention to the 'regulatory perimeter', the boundary of what and who the FCA regulates.
Perimeter issues are a cross-sector priority under the future of regulation. Consumer harm often occurs on or around the regulatory perimeter, with firms and market participants unclear about the FCA's role. This issue has garnered greater focus since the collapse of London Capital & Finance.
In June 2019, the FCA published its first Annual Perimeter Statement 2018/2019, as part of the Annual Report to highlight any potential gaps in protections to consumers. The FCA has identified a need to extend the perimeter for certain activities related to cryptoassets, which would ordinarily fall outside the existing framework. The regulator also highlighted the need to manage technology companies entering the financial services sector.
The feedback statement on duty of care will be of particular interest to regulated firms and industry groups. If the FCA chooses to implement a codified duty of care, it could trigger fundamental cultural change within firms. Instead of asking whether something falls within current regulations, firms will need to make an analysis of whether conduct is right in the circumstances.
Whilst the suggestion of a statutory duty of care did not receive much support during the consultation, if implemented, it would give consumers a right of action and risk litigation being pursued.
It remains to be seen whether the regulator itself can instil cultural change. Some stakeholders have commented that the roll out of the Senior Managers and Certification Regime has gone some way to encourage a change. However, others believe cultural change can only be successfully implemented from management, within firms.
Later this year, the FCA will publish a further paper seeking views on options for change which should enable firms to understand the direction of travel.
The FCA's stated aims are to continue to be an effective regulator for the future, use technological advancements to improve efficiencies and in turn, increase the benefit of regulation against costs.
On both technology and perimeter issues, rather than adopting a reactive model, the FCA appears to be taking a pre-emptive approach. With the emergence of new technologies, the FCA recognises there may be areas of financial activity which are not sufficiently covered by existing regulation. By making such assessments as part of the Annual Report, the FCA hopes to see a reduction in perimeter issues and improved efficiency.
Only time will tell if the FCA is able to meet these objectives, particularly without any increase in resources to do so.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2019. Specific advice should be sought for specific cases. For more information see our terms & conditions.