FCA Business Plan – 2018 update
Each year, the Financial Conduct Authority (FCA) sets out its priorities for the next 12 months in its annual Business Plan. Unsurprisingly, assisting the government with the UK’s withdrawal from the EU dominates the 2018/19 document.
The FCA’s work relating to EU withdrawal will include:
- Providing technical advice associated with the EU (Withdrawal) Bill
- Converting existing EU legislation into UK law
- Advising the Treasury on how the UK’s future relationship with the EU may affect the financial services industry.
Chief Executive of the FCA, Andrew Bailey, admits that EU withdrawal will “inevitably affect the amount of work we can undertake in other areas”. With the obvious focus on Brexit, the FCA have had to rigorously scrutinise and challenge its priority areas for 2018/19. Nevertheless, they have upheld a level of continuity across crucial priorities including “Treatment of existing customers”, “Firms culture and governance” and “Financial crime and anti-money laundering” in tandem with the introduction of two new cross-sector priorities of “Long term savings, pensions and intergenerational differences” and “High cost credit”. This reflects the FCA’s attempts to prioritise areas they consider to involve a greater risk of harm to consumers, market integrity or competition.
In this article, we focus on four of the Sector Priorities referred to in the 2018/19 FCA Business Plan and provide an overview of some of the topics discussed in each.
Treatment of existing customers
The FCA intends to continue reviewing the treatment of existing clients, with a focus on pricing practices in general insurance to ensure existing customers are not treated less favourably than new. Insurers are advised to review their treatment of existing customers and be prepared for scrutiny of their pricing strategies and frameworks, policies, systems and data use. In particular, the FCA will continue their review of the type of systems and data firms use to set the final price of insurance to consumers. They will also be considering the requirement for future monitoring of insurance pricing practices to promote a transparent fair market that demonstrates value for money.
One specific target area the FCA is to take responsibility for in spring 2019 is Claims Management Companies (CMCs). The FCA is of the belief that the inflation of claims adopted by brokers and motor insurers is a direct result of some CMCs not acting in the best interests of consumers.
General insurance and protection
The transposition of the EU’s Insurance Distribution Directive (IDD) in October 2018, will provide the FCA with a further incentive to review and intervene in practices where issues arise over poor product design and communication. The implementation of the IDD is intended to reduce the risk of firms selling unsuitable products to consumers and will require firms to identify the target audience for products to ensure the consumers’ needs are met. Potential changes for insurers may include: transparency in cross-selling and add-ons; additional training for staff in being fair, clear and not misleading; and explaining to customers the nature of the remuneration received in relation to the insurance contract.
Financial crime and anti-money laundering
Tackling financial crime remains a key priority in the 2018/19 Business Plan.
The FCA appreciates that the UK needs a more comprehensive overview of how capital markets are being used for money laundering and is set to undertake diagnostic work to decide on the best approach in maintaining the integrity and fairness of UK markets.
The FCA is keen to enhance industry control on financial crime through innovative technological solutions and is convening an international TechSprint, bringing together a range of experts to explore whether technology can be used more effectively to fight financial crime. Automated systems using artificial intelligence for outsourcing arrangements, transaction monitoring and Know Your Customer checks are likely to provide greater cost and time saving benefits.
Innovation, big data, technology and competition
Technology is a recurring theme throughout the FCA’s 2018/19 Business Plan and it hopes to continue supporting and encouraging new initiatives developed by firms. They propose to continue providing firms of all sizes with the opportunity to test the commercial and regulatory viability of their innovative concepts through the use of the FCA’s regulatory sandbox that was created in 2016, prior to any substantial investment. Currently, the sandbox only provides for testing in the UK. However, given that many aspects of financial markets are global, the FCA has invited stakeholders to share their views on creating a global cross-border sandbox to help firms accelerate and expand into other jurisdictions.
It is also worth mentioning that cryptocurrency, which falls under this priority sector, is an area of increasing interest for the FCA. Whilst cryptocurrencies themselves are not within the FCA’s regulatory perimeter, the FCA has confirmed that cryptocurrency derivatives are capable of being financial instruments under the Markets in Financial Instruments Directive II (MFID II). Firms conducting regulated activities in cryptocurrency derivatives must comply with all applicable rules in the FCA’s Handbook and EU regulations.
The FCA plan to work with the Bank of England and HM Treasury as part of a taskforce to develop and publish a Discussion Paper outlining the FCA’s thoughts on cryptocurrencies. In May 2018, we saw the start of the FCA regulating cryptocurrency businesses as it was reported that 24 investigations into such business’ had been opened. Therefore, those firms offering or insuring services linked to cryptocurrency derivatives should prepare for the potential impacts of greater regulation.
Whilst the UK’s withdrawal from the EU will take priority in the upcoming year and beyond, the FCA have made it clear that this will not diminish its high expectations on firms to ensure that the UK upholds its reputation as an attractive trade market post March 2019.