Business plan

UK Financial Regulator’s Business Plan: Key Takeaways and Potential Enforcement Goal

The logo of the new Financial Conduct Authority can be seen at the agency’s headquarters in the Canary Wharf business district in London. REUTERS / Chris Helgren

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

The business plan sets out the regulator’s priorities for the coming year (and beyond) and is therefore an important indicator of FCA’s future priorities and direction. This year’s plan follows a year in which the regulator focused on managing the immediate consequences for financial services of the COVID-19 pandemic (including bringing its loss insurance test case operating).

The FCA, like financial regulators around the world, has placed more emphasis on sustainability and ESG, in particular climate change, given the central role of financial services companies in the allocation of capital. as well as the prudential risks posed by climate change. This year’s business plan signals a continued shift from ESG governance, controls and disclosures being a ‘good to have’ to a strict regulatory expectation.

For example, the FCA points out that in January 2021, it introduced a new rating rule following recommendations from the Working Group on Climate-Related Financial Disclosures, an organization created by the Financial Stability Board in 2015 to improve communication. climate-related financial information. The new rule requires companies listed on stock exchanges in the UK, among others, to disclose in their annual financial report the climate-related risks and opportunities that the relevant organization has identified in the short, medium and long term.

The FCA confirms in the business plan that it is consulting on the extension of these new disclosure rules to asset managers, life insurers and pension plans regulated by the FCA, and that it aims to put new rules in force from January 1, 2022.

In addition, the regulator will step up its scrutiny over whether asset managers market the ESG properties of funds in fair, clear and non-misleading terms. ESG and sustainable investment funds are currently the fastest growing segment of the European fund market and consumers place great importance on ESG-related investment opportunities.

The business plan is accompanied by guidelines issued to the presidents of approved fund managers, published on July 19, 2021, which define the FCA’s expectations in terms of the design, delivery and disclosure of ESG investment funds and sustainable. The general principle of the guidelines is that the ESG and / or sustainability orientation of a fund should be reflected in a coherent manner in its design, delivery and disclosure (including its name, stated objectives, policy and investment strategy. documented investment and its assets). This is part of a larger FCA goal to ensure that asset managers market investment products in a fair, clear and non-misleading manner.

FCA will increasingly challenge businesses at the authorization gateway level, and on an ongoing basis, to help ensure that businesses provide consumers and the market with accurate and thoughtful information about products, services and ESG strategies. In its guidelines, the regulator highlighted recent clearance requests that had fallen short of its expectations, including a fund purportedly presenting itself as investing in companies described as “contributing to a positive environmental impact”, where it did not. was not clear that any of the companies in question were in fact doing this. We are already seeing the heightened expectations of investors and regulators in this area leading to an increase in ESG litigation and we expect this trend to continue.

FCA also aims to improve the diversity and inclusion of its own workforce as well as the financial services industry in general. It highlights a recent discussion paper, prepared jointly with the Bank of England, in which regulators outline their plans to accelerate the pace of meaningful change on diversity and inclusion in the financial sector as a whole. They plan to launch a voluntary pilot data survey later this year in which they will ask companies to provide aggregate data on some or all of the nine characteristics protected under the Equality Act of 2010 (including race and gender), as well as socio-economic aspects. history, for their entire workforce (and not just for the oldest employees). The proposals aim to eventually require all companies to submit this type of data (reporting is currently largely voluntary) albeit on a proportional basis.

While the FCA’s focus on vulnerable customers has long been (and supported by its statutory goal of consumer protection), the problem has become more acute with the ongoing pandemic and its impact on household finances. The business plan puts consumer protection at the forefront.

At a high level, the plan signals a more aggressive and assertive approach to business misconduct, with the regulator noting that it intends to create a more robust authorization gateway for new businesses, to provide oversight more stringent of newly licensed companies and use innovative data, -approaches focused on preventing and stopping misconduct (e.g. social media monitoring to detect and raise awareness of new types of investment scams ).

With regard to its specific work program, the regulator continues to consult on proposals for a new consumer obligation, which would force companies in the retail markets to consider what outcome their customers should be able to expect from their products and services, and to act to enable rather than hinder these outcomes.

The proposed changes could, for example, require companies to make it easier for consumers to understand the financial information provided to them, actively anticipating instances where consumers may misunderstand and structuring the information in a way that prevents the exploitation of financial information. behavioral biases. In its consultation, the FCA cited the example of banks issuing communications urging consumers to focus on the daily cost of an overdraft (which appeared to be low) rather than the large cumulative cost of borrowing. In the regulator’s view, these communications were structured to exploit the tendency of consumers to think short-term, preventing them from making a rational and informed decision. The FCA intends the consumer obligation to end such practices, and it is clear that the regulator sees the obligation as potentially a key pillar of its enforcement strategy going forward.

The past year has seen a proliferation of guidelines and regulatory requirements relating to operational resilience and outsourcing. In March 2021, the FCA released its highly anticipated Operational Resilience Policy Statement. It sets out several far-reaching requirements, including, for example, the emphasis on “impact tolerances” (the maximum tolerable amount of disruption to a major business service), requiring the use of mapping exercises. to prepare “impact tolerances” for important service activities, and the testing of these “impact tolerances” through disturbance scenarios.

FCA confirms in the business plan that it expects companies to implement these requirements, that it will assess, during the period 2021/2022, the progress of companies in implementing these new requirements and identify areas for improvement, and that from March 31, 2022 to March 31, 2025, assess companies’ ability to stay within their “impact tolerances”. After a brief hiatus during which he largely focused on the financial impacts of the pandemic, we expect the FCA to return to operational resilience as a priority area in the coming years.

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

• First, as noted, the regulator will closely monitor whether companies are properly implementing their operational resilience requirements.

• Second, we expect the regulator to seek to use some of the new tools that will be at its disposal (for example, the new consumption obligation and the strengthened rules on financial promotions) to tackle the practices that it will use. considers harmful to consumers, such as misleading marketing (including in relation to ESG-related products) or by exploiting consumer behavioral biases.

• Third, with respect to the wholesale market, we expect the regulator to step up enforcement activities against market-disrupting faults.

With this business plan, the FCA has signaled its intention to take a more assertive and interventionist role in financial services markets, and companies should expect increased regulatory intrusion and challenge in areas of intervention. of the FCA.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the principles of trust, is committed to respecting integrity, independence and freedom from bias. Westlaw Today is owned by Thomson Reuters and operates independently of Reuters News.

Christophe robinson

Christopher Robinson is a partner in the dispute resolution practice at Freshfields and responsible for the firm’s financial litigation practice in London. He advises on a range of litigation and investigations in the banking and financial services industry and can be contacted at [email protected]

Piers Reynolds

Piers Reynolds is a partner in the dispute resolution practice at Freshfields, based in London. He has experience advising banks, insurers and other financial institutions in financial litigation and regulatory investigations. He can be contacted at [email protected]

Charles Mondelli

Charles Mondelli is a partner in the dispute resolution practice at Freshfields, based in London. He can be contacted at [email protected]


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