The FCA has set out an ambitious vision for transformation in its Business Plan for 2021/22, the first under Nikhil Rathi's leadership since he was appointed CEO in October 2020.
Whilst, on its face, the headline regulatory priorities will seem broadly familiar following on from the previous year's Business Plan – i.e. (a) in the consumer markets, building on enabling effective consumer investment decisions, ensuring credit markets work well, making payments safe and accessible, and delivering fair value in the digital age; (b) in the wholesale markets, reinforcing the effectiveness of the UK primary and secondary markets in the aftermath of Brexit; and (c) cross-market, focusing on fraud, operational resilience, ESG, and diversity and inclusion – the tonal shift in this year's Business Plan is striking.
In his introductory message and speech launching the Business Plan, Rathi notes the profound forces transforming financial services – the pandemic, Brexit, rapid technology developments and the drive towards a greener and more sustainable net-zero economy – as creating new opportunities, whilst at the same time posing greater operational and market integrity risks whereby harm can occur in new and much faster ways. Rathi acknowledges that the FCA needs to raise its game considerably in response and prove "we are a learning organisation". At the heart of the Business Plan is a vision to transform the FCA to face the future and a promise to deliver in the public interest.
Transforming the FCA
This transformation of the FCA involves making progress on three fronts:
- by being more innovative – the FCA will be adopting a new data-driven approach in order to identify and stop harm more quickly. In order to do so, it has committed to invest more than £120m in its technological and data capabilities over the next three years;
- by being more assertive – the FCA will be prepared to test the limits of its powers, take greater risks in making difficult decisions, and carry out more intervention to identify and stop harm quickly and effectively in real-time. Where it has limited or no powers to intervene – i.e. where things fall on the edges or outside its "regulatory perimeter", it will engage with partners to drive up standards; and
- by being more adaptive – in a world of constant disruption, the FCA will adjust and be agile to respond to ever-changing challenges as consumer choices and the markets evolve.
Whilst acknowledging that the significant changes required as part of its transformation will not happen overnight, the FCA has reinforced its commitment to be held accountable on its progress by setting out key strategic overarching outcomes and metrics, with the first reporting to commence from April 2022.
Rathi says that to meet the profound challenges reshaping financial services and to prepare for inevitable future disruption, "the FCA must continue to become a forward-looking, proactive regulator. One that is tough assertive, confident, decisive, agile. One that acts, acts fast – and where we can't act, engages enthusiastically with those who can". We can expect to "to continue to see an FCA that looks and feels even more different. One that operates differently, partners differently, and communicates differently… One that is not only purposeful but that is fit for purpose".
What the FCA's transformation plan means for regulated firms and individuals
The regulatory perimeter. The emphasis in the Business Plan on speed - on the need to act quickly and efficiently to identify and stop harm in real-time - signals that we are likely to see a much more interventionist and intrusive approach by the FCA at an earlier stage to protect consumers and the integrity of the financial system, particularly where new investments/products promoted by technology are involved. The FCA has indicated it will strongly enforce its role as a gatekeeper to stop bad actors from being let into the system in the first place. Further, outside of its regulatory perimeter, the FCA has vowed not to just stand by and let suspected misconduct continue, but to work with partners to reduce such harm. Regulated firms and individuals may be asking whether this means a shift in focus, diverting attention away from them. We think that unlikely to be the case. As with previous Business Plans, clearly the FCA will continue to expect regulated firms and individuals to be rigorous in upholding the high standards expected of them and it will remain driven to seek enforcement action in cases of failures in the priority areas outlined in its Business Plan. Moreover, we note from Mark Steward's speech to the City & Financial Global FCA Investigations & Enforcement Summit on 18 May 2021 (where the focus was very much on unregulated activity, particularly online investment scams) that a warning has been sounded to regulated firms that they should be doing more to prevent harm also - "regulated firms who let down their guard, especially in assisting firms on our Warning List, may well face action from us for doing so as well." It is clear that the FCA will expect a step up from all regulated players in the financial services sector.
Testing its powers to the limit. We have already seen how the FCA has been willing in recent times to resort to the courts to test the boundaries of its powers, as demonstrated by its approach in the Business Interruption Insurance litigation test case. Many in the market will, of course, also be keenly monitoring developments in the FCA's first criminal prosecution under the 2007 Money Laundering Rules in the proceedings launched against Natwest. Anticipating that the FCA's actions will be scrutinised and challenged and "we will not always win", Rathi says that this will not be seen as a failure "because history shows that where our perception of risk prevented necessary action, we ended up with a bigger problem." The increasingly proactive and assertive stance of the FCA in pushing its powers to the limit, therefore, looks set to stay.
Technology and data. Rathi notes that the FCA will, over the next five years, become a data regulator as much as a financial one. Given the critical emphasis placed on data and technology in the FCA's vision for transformation, regulated firms will likely find an increased focus by the FCA on the quality and sophistication of the data that is expected to be reported as part of its ongoing oversight duties, as well as in disclosures in any enforcement action. Firms will want to ensure their technological capabilities are up to scratch and can match the FCA's commitment to use innovation to help regulate the financial system.
There is no doubting the FCA's very clear intention to raise its game in order to become a forward-looking, proactive regulator. As the FCA sets out on its journey of transformation, firms will need to pay heed and expect a stricter and more interventionist approach going forwards.
The FCA's Business Plan for 2021/22 can be found here.