What can we learn from the FCA’s business plan?

Sarah Isted

The Financial Conduct Authority (FCA) has set out its priorities and agenda for 2017/18 in its annual business plan. The regulator continues a number of themes from its work in 2016/17, while signalling an increasing focus on vulnerable customers, cyber resilience and FinTech.

The FCA sets out six cross-sector priorities: culture and governance, financial crime and anti-money laundering, competition and innovation, technological change and resilience, treatment of existing customers, and consumer vulnerability.

The latter is a notable addition to last year’s priorities, and is also highlighted in the FCA’s Mission, published alongside the business plan. In the Mission the FCA pledges to prioritise customers in vulnerable circumstances – for example, consumers who are unable to shop around. This signals a subtle shift in the FCA’s approach and firms should keep a close eye on how it implements this in practice. Vulnerable customers are relevant to all sectors, and will be particularly pertinent in the FCA’s planned work on high-cost credit and overdrafts, pension scams and mortgages.

The FCA also sets out how its priorities apply to each of the sectors it regulates. Taking a look at some of these in detail, in the banking sector the FCA highlights a number of long-standing challenges, such as the ability of banks’ systems to defend against cyber attacks and prevent financial crime. And it confirmed that much of its focus in 2017/18 will be on ensuring that existing high profile initiatives in retail banking such as the Payment Services Directive 2 and the Senior Managers & Certification Regime are fully implemented and embedded into business and operating models. For wholesale banking, the main message is of a continued commitment to work begun in 2016/17, such as implementation of EU policy, a focus on primary markets and corporate and investment banking competition.

But firms should take note of a number of new initiatives. These include a review of the retail banking business model, which will look at the links between different parts of businesses and their profitability. This could impact banks’ strategies and use of cross-subsidisation, while for consumers it could mean fairer outcomes. In addition, retail banks should prepare for two newly-announced mortgage thematic reviews: one on how firms treat borrowers whose interest-only mortgages are approaching maturity, and another on forbearance to customers in financial difficulty. The regulator has looked at both of these topics closely in recent years, but it appears to remain concerned about whether firms are treating customers fairly.

In the insurance sector, the FCA continues to drive forward its focus on value for money. It announced two new regulatory exercises: a market study to see if the commercial general insurance market is working effectively, and a review of complex distribution chains to establish whether the number of ‘middle men’ that arrange insurance is justified or erodes value. These activities come on top of previously-announced work on insurers’ pricing practices, and implementation of the Insurance Distribution Directive. The FCA seems concerned that insurance is overpriced – either because insurers are taking advantage of existing customers, or ‘middle men’ are taking too large a slice of profits. Firms will need to effectively engage with the regulator if they wish to challenge these assumptions.

For asset managers, the headline item remains the FCA’s market study of the sector, with the final report due in Q2 2017. The business plan also indicates a number of emerging areas of focus, such as liquidity management. Technology will be a big area of focus for the asset management sector this year too, as the FCA continues to support firms looking to offer innovative products and services such as robo advice.

Overall, the FCA’s business plan is incremental rather than radical. Given the changes we are seeing in the market, the shifting needs of customers and the impact of Brexit, the FCA could have been a bit more radical. But the FCA acknowledges that Brexit will require regulatory flexibility, so it could well change its agenda as the post-Brexit regulatory landscape becomes clearer.

It’s also surprising that the FCA didn't comment more on the impact of mental health issues on the conduct agenda within firms. The recent Banking Standards Board annual review found that more than 25% of employees believe that working at their firm has a negative impact on their health and wellbeing. Research that we carried out with the London Business School told us that when employees are under stress, the likelihood of unethical behaviour increases. The regulator has been focusing on mental health as part of its recent TechSprint activity and could have added more about this in the business plan. 

For firms’ management teams, who are already facing demanding schedules to implement strategic plans in response to Brexit, the FCA’s business plan adds to a challenging workload.

To find out more about what the business plan means for you, please join us for a live Q&A webcast with FCA Head of Strategy Development Richard Monks on 10 May 2017.