FCA Business Plan 2021/2: A New Era in Financial Services Regulation in the UK?

The FCA’s Business Plan for 2021/22 was published on 15 July 2021, three months later than originally scheduled. To put this delay into context, there appears to have been a major shift in policy objectives led by the UK Treasury following the end of the Brexit transition period in December 2020. 

This was clearly signaled in a speech by FCA CEO, Nikhil Rathi, to the Association of Foreign Banks on 6 May, Regulation for a Different World. “It’s not consistent with the FCA’s objectives to target equivalence at any cost” (as a means to re-gaining access to EU markets), he declared. Instead, “our approach will be guided first and foremost by our continued commitment to high, internationally consistent standards and proportionate regulation”. 

This policy shift appears to have triggered a top-to-bottom review of the FCA’s own objectives and priorities, hence the delayed publication.

The CEO’s message

Nikhil Rathi’s introductory remarks and accompanying presentation both pick up the theme of Brexit offering a new opportunity to review regulations. In particular, he sees the potential for greater flexibility and much quicker decision making, albeit that change will be firmly anchored to international standards. One example he cites is the recently announced review of commodity position limits under UK MiFID.

The FCA’s role

The introductory chapter of the Business Plan emphasizes two key tasks for the FCA:

• Making the markets for financial services work better by fostering competition and innovation; and
• Preventing serious misconduct by financial firms and their staff, with an emphasis on smarter use of technology (for example, using market “cleanliness” data).

These objectives are set in a context of rapid change: the digitalisation of financial services, the move to a “net zero” economy, and an era of persistently low returns leading to consumers being attracted to risky investments.

Other over-arching themes include:

• The Future Regulatory Review: will transfer some rule-making powers to the FCA;
• A gradual end to transitional Brexit reliefs for UK firms who must also be alert to divergence from EU regulations;
• A more robust gateway to FCA authorisation – a process that is easier to navigate but with tougher assessment;
• Stronger oversight of rapidly growing firms: the Regulatory Scalebox; and
• An upcoming consultation on proposals to streamline FCA decisions on authorisation and enforcement action.

Cross-market priorities – the major themes:

Financial resilience and resolution: the implementation of the UK’s new Investment Firm Prudential Regulation is intended to bring a new focus on firms having the necessary financial resilience to withstand most types of risk. Those that do fail must be adequately capitalised and resourced to do so in an orderly fashion, removing the threat of harm to consumers, wholesale markets and the financial system.

ESG: the FCA’s recently published consultation on climate-related disclosures for asset managers focuses on the environmental dimension but also anticipates a broader ESG Sourcebook with a range similar to the EU’s Sustainable Finance Disclosures Regulation (“SFDR”). The FCA is also clearly anxious to face up to the threat of greenwashing – firms trying to establish the green credentials of their products without the substance to back up their claims – as emphasised in a “Dear CEO” letter to regulated firms.

International firms: the FCA clearly wants to signal that it is open for business but not in a way that will threaten its regulatory perimeter. One particular concern is the influx of EEA firms that have taken advantage of the FCA’s Temporary Permissions Regime (“TPR”), and the equivalent Temporary Marketing Permissions Regime (“TMPR”) for funds, which has provided a transitional regime for those previously passporting their products and services into the UK.

The FCA has given due notice about the potential harm from international firms in areas such as consumer protection and client assets. In particular, it will scrutinise particularly closely authorisation applications from the UK branches of such firms and may well end up rejecting many.

Wholesale market priorities – major themes:

Appointed Representatives (“AR”): the FCA proposed increased and more targeted supervision on Principal Firms and their ARs, with a focus on competence and financial stability. This is aimed at ensuring that the Principal’s compliance framework adequately monitor all the activities of its Ars and highlight the key current and potential risks. 

Rules review in primary and secondary markets: the FCA wants to ensure that the needs of investors and companies seeking to raise finance are supported within an adequate risk framework. Already in play is a review of listing rules, particularly to align these with climate-related objectives, and a revamped regime for Special Purpose Acquisition Companies (“SPAC”).

LIBOR transition: the FCA is looking to complete the process of an orderly transition to alternative risk-free rates in all the major currencies. The FCA intends to co-ordinate closely with other international authorities in supporting both new firms and those with legacy issues.

Consumer priorities: the FCA warn that the pandemic has heightened the risk that individuals will take on debt to meet short-term shortfalls in income. Also, they may be unable to meet repayments in the medium to long term, particularly if interest rates revert to long-term norms.

The FCA highlights several supervisory initiatives to mitigate these risks:

• Closer monitoring of firms' regulatory permissions to prevent the so-called halo effect that FCA authorisation status confers;
• Stronger oversight of newly authorised firms through a new Regulatory Nursery; and 
• Stronger oversight of firms looking to scale rapidly via the Regulatory Scalebox.
• Other important initiatives include a new Duty of Care (a new Principle for Businesses, currently under consultation), and a Consumer Investments Strategy to tackle firms who cause consumer harm.

FCA Budget: although the FCA seems to cite special circumstances to justify one-off increments in its budget almost every year, the end of the Brexit transition appears to offer no respite with an overall proposed increase of 4% to £614 million. The FCA continues to spend some £10 million a year on “Transition” including capital expenditure on technology and information systems.

Concluding remarks

The FCA wants to be seen as a forward-looking, proactive and data-led regulator which is prepared to meet future challenges head-on in a tough, decisive, and agile fashion. Such aspirations have been heard before but for once do not look out of place in the context of a fresh FCA management team encouraged to think big by its Treasury paymasters. We expect a raft of announcements coming out of the regulator in the next few months which will flesh out the broad themes outlined in this year’s Business Plan.

How we help

We have a wide range of solutions designed to support you address the changes and challenges raised within the FCA’s latest business plan.  These include:

• Brexit solutions, to help global firms find solutions to overcome their Brexit challenges and continue to access the UK and EU markets.
• IFPR solutions, to make your prudential and regulatory reporting obligations as simplified and seamless as possible. 
• ESG advisory solutions, to help you gain clarity on your ESG requirements, mitigate risks, and build a strong compliance program. 
• Appointed Representative solutions from ACA Mirabella, to support you if you wish to simply provide investment advice, arrange deals, market funds, provide corporate finance etc. in the UK.
• LIBOR transition support, to help you devise your LIBOR transition plans, assess and review your firm’s reliance and usage of LIBOR, or perform a gap analysis review of your transition work to date.
• Training, which can be customised to meet your learning objectives and the content developed to meet your specific requirements. Check out our menu of open and tailored training topics.

We also offer a raft of other compliance consulting and managed services solutions. 

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