UK financial regulator business plan: key takeaways and potential focus on enforcement

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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 financial 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 test case of disruption insurance of activity).

The FCA, like financial regulators around the world, has increased its focus on sustainability and ESG, particularly climate change, given the central role of financial services firms in capital allocation as well than the prudential risks posed by climate change. This year’s business plan flags an ongoing shift from ESG governance, controls and disclosures as a “nice to have” to a strict regulatory expectation.

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For example, the FCA points out that it introduced a new listing rule in January 2021 following recommendations from the Task Force on Climate-Related Financial Disclosures, an organization created by the Financial Stability Board in 2015 to improve disclosure of climate-related financial information. The new rule requires companies listed on the UK stock exchange to, among other things, disclose in their annual financial report the climate-related risks and opportunities that the organization concerned 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 schemes regulated by the FCA, and that it aims to put new rules come into force from 1 January 2022.

In addition, the regulator will increase its prudential attention to 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 guidance to chairpersons of licensed fund managers, published on July 19, 2021, which sets out the FCA’s expectations for the design, delivery and disclosure of ESG investment funds and durable. The fundamental principle of the guidelines is that a fund’s ESG and/or sustainability focus should be consistently reflected in its design, delivery and disclosure (including its name, stated objectives, documented investment policy and strategy and holdings). This is part of a wider FCA objective to ensure that asset managers market investment products in a fair, clear and non-misleading manner.

The FCA will increasingly challenge companies at the authorization gateway level, and on an ongoing basis, to help ensure that companies provide consumers and the market with accurate and thoughtful information about products, services and strategies. ESG. In its guidelines, the regulator highlighted recent applications for approval that had fallen short of its expectations, including a fund that would claim to invest in companies described as “contributing to positive environmental impact”, where it does not was not clear that any of the companies in question were in fact doing so. We are already seeing heightened investor and regulator expectations in this area leading to an increase in ESG-related litigation and we expect this trend to continue.

The 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 diversity and inclusion change across the financial sector. They intend to roll out 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 2010 (including including race and gender), as well as socio-economic data. historical, for all of their workforce (and not just for the oldest employees). The proposals foresee that all companies will eventually be required to submit this type of data (reporting is currently largely voluntary), but on a proportional basis.

Although the FCA has long focused on vulnerable customers (and builds on its statutory objective of consumer protection), the issue has become more acute with the ongoing pandemic and its impact on household finances. The business plan places consumer protection at the forefront.

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

With regard to its specific work programme, the regulator is continuing its consultations on proposals for a new consumer obligation, which would force companies in retail markets to ask themselves what result their customers should be able to expect from their products and services, and to act to enable rather than hinder these results.

The proposed changes could, for example, require companies to make it easier for consumers to understand the financial information provided to them, actively anticipating where consumers might misunderstand, and structuring the information in a way that prevents the exploitation of biases. behavioral. In its consultation, the FCA cited the example of banks issuing communications encouraging consumers to focus on the daily cost of an overdraft (which seemed low) rather than the large cumulative cost of borrowing. In the regulator’s view, these communications were structured to exploit consumers’ penchant for short-term thinking, preventing them from making a rational and fully informed decision. The FCA wants 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 guidance and regulatory requirements related to operational resilience and outsourcing. In March 2021, FCA released its long-awaited Operational Resilience Policy Statement. It sets out several far-reaching requirements, including, for example, a focus on “impact tolerances” (the maximum tolerable amount of disruption to a significant business service), requiring the use of mapping exercises to prepare “impact allowances” for significant business activities. services, and testing these “impact tolerances” through disruption scenarios.

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

Given the priorities set by the Authority, we believe that there are several areas where the Authority is likely to focus its thematic supervisory and enforcement activities in the coming years:

•First, as noted, the regulator will closely monitor whether companies are properly implementing its 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 duty and the strengthened rules on financial promotions) to attack practices that it considers to be detrimental to consumers, such as misleading marketing (including in relation to ESG-related products) or exploiting consumer behavioral biases.

•Third, with respect to the wholesale market, we expect the regulator to increase its enforcement activities against market-disrupting misconduct.

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 challenges in the areas of CFA intervention.

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Christopher Robinson

Christopher Robinson is a partner in the dispute resolution practice at Freshfields and head of 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 Christopher.Robinson@freshfields.com.

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 on financial litigation and regulatory investigations. He can be contacted at Piers.Reynolds@freshfields.com.

Charles Mondeli

Charles Mondelli is a partner in the dispute resolution practice at Freshfields, based in London. He can be reached at Charles.Mondelli@freshfields.com.


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