In the blizzard of tweets, e-mails and other output emitting from the Financial Conduct Authorirty (FCA), it may seem that the publication this morning of the FCA’s Business Plan for 2021/22 is something of lesser importance. Many may not have given it more than a cursory glance but it is actually an extremely important document for firms currently regulated by the FCA and for those applying to become regulated. That's because it points out the regulator’s strategic direction, and where it will be focusing its activities and resources. To help firms in the Payment Services Sector we have prepared a short summary of the key points of note.
Signalled a more assertive style
In his opening message the FCA's Chief Executive, Nikhil Rathi, states that the FCA will be “more innovative, more assertive, and more adaptive”. Of these, an increase in assertiveness is probably the most interesting, and possibly concerning, for FCA regulated firms. Rathi states that the FCA will be “testing the limits of our own powers and engaging with partners to make sure that they bring their powers to bear”.
This is likely to mean that where the FCA sees customer detriment, even if there is any doubt as to the FCA’s power to act, they will act on the assumption that they have the power and argue about it afterwards. Firms with activities which are on or around the regulatory perimeter need to be aware of this.
Highlighted important cross-market issues
The FCA has identified six of the 'most important cross-market issues' on which they will focus. These are:
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Fraud
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Financial resilience
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Operational resilience
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Improving diversity and inclusion
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Enabling a more sustainable financial future
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International cooperation
The first three of these reinforce messages that the FCA has been putting out over the past few months.
They are concerned about fraud being facilitated by, or at least not being actively prevented by, regulated firms. A focus on the risk of fraud within your own organisation is therefore important, as is the potential for your business to be facilitating fraud by your clients.
Financial resilience is something that the FCA have shown real concern about. Showing that your firm has the necessary capital, and importantly, liquidity to be able to continue to operate even in tough times is vital. The new Operational Resilience requirements come into force for payment services firms on 31 March 2022. Our Webinar 'Payment Services: Building Operational Resilience' can be viewed on demand. It offers an explanation of the new regulations and the actions firms need to be taking. This will require significant time and effort, so it is important that firms don’t leave it to the last minute.
Raising the bar - key implications for new applications
The Business Plan then moves on to how the FCA is changing to improve performance and meet future challenges. It says that it is “setting the bar high”, and that “at a minimum they expect firms to meet their standards and do the right thing by their customers” all of which, in truth, you would expect.
However, as a way of doing this the FCA then says that it will “ensure firms start with high standards and maintain them.” This involves “a more robust gateway”, making it tougher to get authorised, with more intensive assessment and greater scrutiny of financial information and business models.
For those firms contemplating applications for authorisation, getting the application right and being well prepared will become even more important. The FCA is looking to change and speed up decision-making for refusals, which makes refusal more likely if the application is not up to scratch. Forbearance at the gateway is likely to be a thing of the past.
The already announced “regulatory nursery” with enhanced oversight in the early days after authorisation will complement this, as will the 'regulatory scalebox' for those firms with plans to quickly increase the size of their business. The FCA talks about the need for “a smart compliance culture and sound governance.”
Financial promotions
Firms must enable consumers to make informed decisions and the Plan particularly mentions online advertisements as “the biggest source of consumer fraud”. Firms which advertise online should take heed and carefully review their online marketing content.
Carrying over 2020/21 objectives
In the FCA’s 2020/21 Business Plan it highlighted four consumer outcomes it wanted to achieve, and these have been carried over into this year’s Plan:
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Enabling consumers to make effective financial decisions. The FCA specifically mention the risks of cryptoassets and can be seen as actively discouraging investments in them. They have signalled that they will shortly be publishing a three year consumer investment strategy
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Ensuring consumer credit markets work well. Of specific note here is the plan to consult on bringing the 'Buy Now Pay Later' sector into regulation, following the Woolard Review recommendations
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Making payments safe and accessible. Interestingly, cryptoassets are mentioned here, in relation to their use in payments and the potential benefits, but also to say that the FCA is working with the Treasury and Bank of England on developing a new regime for this. There is also a continued focus on safeguarding and the financial robustness of payment services and e-money firms. The FCA say that it will be reviewing firms’ prudential and wind down arrangements and safeguarding audits on a targeted basis. Firms in the sector which have not reviewed their arrangements would be well advised to do so urgently
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Delivering fair value in a digital age. The FCA will be building its digital markets strategy. They will particularly investigate practices, such as ‘sludge practices’, which make it hard for a consumer to cancel any product or service online
Conclusion
In summary, the FCA is planning to be tougher, more assertive and more active in the coming year. Firms seeking to apply for authorisation, as well as those already regulated by the FCA need to have a good understanding of what the regulator’s expectations are and have systems and processes in place to enable them to evidence that those expectations are being met.
The FCA sees proper, smart, informed compliance as a prerequisite for operating in regulated markets, and will be active in checking that it is in place, and in taking action when it finds that it is not.
