Topic: Highlights of the FCA’s new approach in 2021
Overview: The Financial Conduct Authority’s (FCA) has provided a press release reflecting on their activities in 2021.
They reiterated their mission statement which is to protect consumers from harm, enhance the integrity of the UK’s financial system and promote competition.
The FCA confirmed that they continue to pursue these objectives while also working to become a more innovative, adaptive and assertive regulator. This approach will enable the FCA to meet the challenges of:
the increasingly data-driven financial services sector in the UK;
the shift to a net-zero economy;
the continuing effects of the pandemic; and
helping build a new regulatory regime after Brexit.
In January, the Supreme Court delivered its judgment in a case brought by the FCA to clarify business interruption insurance cover. Since then, over £1.2bn has been paid out to settle claims made by small businesses.
The FCA has innovated to better protect consumers by providing information to consumers to enable them to make improved financial decisions. The FCA launched its £11m InvestSmart campaign in October, targeting its ‘don’t get played’ message at younger, higher-risk investors. InvestSmart forms part of the FCA’s new consumer investment strategy, which is designed to give consumers greater confidence to invest and to help them do so safely. The strategy’s measures include exploring changes to make it easier for consumers to invest in straightforward financial products, more assertive action to disrupt investment scams and strengthening rules around financial marketing.
The FCA has taken away approval to undertake financial services from 176 firms, which have not carried on regulatory activity in the last 12 months. The FCA’s ‘use it or lose it’ approach is designed to protect consumers who may be misled about the level of protection they have when buying products from firms that do not need to be authorised by the FCA.
The FCA has also continued to alert the public to scams, with a record 1,300 warnings issued over the past year. The FCA’s contact centre has this year prevented £4m being lost to scams. Additionally, the FCA has secured £5m to be paid back to people who invested in companies that were not authorised to undertake financial activity. A further £28.5m has been frozen due to FCA action to be paid back to investors, subject to the outcome of legal action.
Throughout 2021, the FCA has engaged social media platforms and search engines to help ensure they comply with laws to protect people from scams and high-risk investments. As a result, Google has made changes to its policies to ensure that any financial advertiser has to be authorised by the FCA. The FCA has also called on Government to include paid-for advertising in the Online Safety Bill and pushed for changes to the regulation of crypto-assets. In addition, the FCA has continued to challenge crypto asset firms who require registration for money laundering purposes. Nearly 90% of those firms have been refused or withdrawn their application as a result of FCA action.
The FCA began consulting on a new consumer duty to introduce a higher and more consistent standard of consumer protection for financial services consumers by July 2022. Guidance published in February also set out how firms should better protect customers in vulnerable circumstances when they design their products, market and explain them, and in the support they provide to their customers when things go wrong.
As the economy and consumers continue to adapt to the pandemic, the FCA has kept its guidance on how lenders should fairly treat impacted consumers under review.
Enhancing the integrity of the UK’s financial system
The FCA has continued to act to protect and enhance the integrity of the UK financial system through its enforcement cases which resulted in financial organisations in the UK being fined £568m in 2021 include:
NatWest was fined £264m in the FCA’s first ever criminal prosecution under anti-money laundering legislation.
The FCA has also taken action against individuals for insider dealing, non-financial misconduct and carrying out regulated activities without authorisation. Beside enforcement cases, the FCA has also varied a firm or individuals’ permissions over 100 times in 2021.
To ensure quicker action to protect consumers, the FCA reformed its decision-making processes in November. These changes include allowing senior managers to take the call on a firm’s authorisation, whether to impose requirements or begin criminal or civil proceedings.
The FCA is also applying standards more robustly when authorising firms. In the year to 2 December 2021, 1 in 5 firms (up from 1 in 6 when we last reported) which applied for authorisation were refused, rejected or withdrew their application after discussions with us. Newly authorised financial firms will benefit from additional support following a pilot run by the FCA over the last year. When fully rolled out in 2022, this early oversight, with regular contact from the FCA, will help ensure firms treat their customers fairly during the crucial early years of their development.
As part of its on-going transformation, the FCA has set out innovative, ambitious plans for its use of data. The approach will mean the FCA collects data better and uses algorithms to identify risks to consumers or markets more quickly. The FCA will further leverage on our digital listening tools help us collect data on everything from mortgages and investments to fraud and scams. For example, analysis of social media combined with the FCA regulatory data showed small businesses were struggling to make claims on business interruption insurance policies, demonstrating the need for FCA action.
In rules that take effect from 1 January 2022, the FCA is tackling the loyalty penalty in home and motor insurance. The FCA found the practice of increased renewal prices for existing customers – known as price walking – was distorting the market and limiting competition. The new measures will save consumers £4.2bn over 10 years.
In December, the FCA confirmed changes to its listing rules to help maintain the UK’s market’s reputation for dynamism by supporting new types of companies seeking investment. The changes will help drive economic growth by encouraging private companies to consider listing on the stock market at an earlier stage. This means more investors will be able to share in the growth of these companies, increasing their investment choices.The FCA has enhanced its world-leading regulatory sandbox, which allows businesses to safely test innovative products or services. The sandbox is now accepting applications on rolling basis rather than firms having to wait for application windows as they previously had to. This will support innovative firms by allowing them to test their ideas at the right point of their development.
In summary Nikhil Rathi, Chief Executive of the FCA, said:
‘The FCA has protected customers, enhanced the integrity of the UK’s financial system and promoted competition this year, despite the additional challenges of the pandemic. We have reformed the general insurance market, saving consumers £4.2bn over 10 years, led the transition from LIBOR and helped small businesses claim £1.2bn against business interruption insurance cover. We are looking forward to using our innovative, adaptive and assertive approach to achieve even more for consumers and the financial market next year.’
Topic: FCA launches discussion on improving the financial services compensation framework
Overview: FCA launches discussion on improving the financial services compensation framework
The FCA published a Discussion Paper aimed at maintaining a compensation framework that provides appropriate protection for consumers, funded in a fair and sustainable way.
The Financial Services Compensation Scheme (FSCS) provides compensation when certain authorised financial services firms are unable to meet claims against them. The FSCS plays a critical backstop role in protecting consumers and ensuring confidence in financial services markets.
The FCA is seeking views on fundamental questions about the purpose, scope and funding of the FCA’s compensation framework to ensure it continues to meet the needs of consumers and firms.
The FSCS’ operating costs and compensation payments are funded by levies on financial services firms. The overall FSCS levy has increased over the last decade, from £277 million in 2011/12 to an expected £717 million for 2021/22. Many of the claims driving these costs relate to historic misconduct by firms in the investment sector, including financial advisers and Self-Invested Personal Pension (SIPP) operators, which have subsequently failed. This pipeline of historic claims is expected to result in further FSCS pay-outs over the coming years.
The FCA is also committed to stabilising and reducing the size of the compensation levy over time. The regulator is taking assertive action to address the root causes of the increase in compensation liabilities by improving the conduct of firms to prevent harm from happening in the first place. The FCA is also improving the financial resilience of firms so they are better able to meet their own redress liabilities and put things right for consumers.
Sheldon Mills, the FCA’s Executive Director for Consumers and Competition, said:
‘We want consumers to have trust in a thriving UK financial services sector, and businesses to be confident that they can bring new and innovative products to market. To achieve this, it is vital that consumers have an appropriate level of protection if things go wrong – and that we find a fair and sustainable way of funding the cost of this protection. Now is the time to ask how we can ensure our compensation framework is fit for the future. We are already taking action against the drivers of compensation claims. These include our measures to reduce the impact when firms fail and to tackle misconduct in the investment market.’
Topic: Strengthening of Appointed Representative Regime
Overview: The FCA has launched a consultation on improving the appointed representatives regime and tackling harm from this model.
An appointed representative (AR) is a firm or person who carries on a regulated activity on behalf, and under the responsibility of, a firm authorised by the FCA (the principal). In appointing an AR, the principal assumes responsibility for the regulated activities the AR carries out.
The FCA is seeing a wide range of harm across all sectors where firms have ARs. This harm often occurs because principals don’t perform enough due diligence before appointing an AR, or from inadequate oversight and control after an AR has been appointed.
The FCA’s proposed changes to the regime aim to address the harm arising in this market while retaining the cost, competition and innovation benefits the AR model can provide. The proposals would improve principals’ oversight of ARs and require principals to provide the FCA with more information on their ARs, allowing the FCA to spot risks more quickly.
The FCA will also expect ARs to be more effectively overseen by their principals.
The FCA is also seeking views, through a discussion chapter in the consultation, on the wider risk posed by some of the business models operated by principal firms, and whether setting limits on such arrangements may help to reduce potential harm.
Sheldon Mills, Executive Director for Consumers and Competition at the FCA, said:
‘The appointed representative model helps bring choices to consumers, but the level of harm we are currently seeing is too high. There are real risks of consumers being misled and mis-sold with little scope for recourse. We have already started work looking at high risk ARs and these proposals build on that work. We want to ensure that principals are properly overseeing their appointed representatives, ensuring they are competent, financially stable and delivering fair outcomes for consumers.’
Brooklands is currently reviewing the Consultation Paper and preparing its response. In the event you would like further information in relation to the Consultation Paper, or would like to discuss its contents in further detail please do not hesitate to reach out by email to firstname.lastname@example.org