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Business Plan 2020-21: FCA remains vigilant to potential misconduct
Some of the key headlines include the following:
The business plan confirms the FCA’s intention to streamline its own decision-making process in respect of authorisation and certain supervisory and enforcement actions by 'changing the balance' of decisions taken by the FCA Executive and the Regulatory Decisions Committee (RDC). This, it explains, is to allow the organisation to make decisions faster to protect consumers and market integrity. This signals a likely rationalisation of current RDC processes but also a potential shift away from the RDC for certain types of decisions currently reserved to it.
Of course, few would argue against measures to expedite the FCA’s internal decision-making processes which can seem interminable for those caught up in the process. However, regulated firms and individuals will be concerned that these changes may reduce the role of the RDC, and the welcome degree of independence which it brings, as an increasing number of decisions are effectively rubber-stamped by wholly internal committees without any degree of independent scrutiny.
Another key theme is the proposed strengthening of the authorisations gateway to make it more difficult for firms to gain authorised status. Standards, we are told, will be higher and applications for authorisation will be more intensively scrutinised.
Once authorised, firms will be subject to a greater degree of scrutiny to ensure that high standards are maintained. In recognition of the fact that authorisation decisions are based on business plans submitted by the firm which can evolve significantly in the early stages, a greater degree of oversight will be applied to new firms to ensure rules are complied with and potential harms identified. While some may take comfort from the phrase ‘regulatory nursery’, it will be interesting to see how the balance will actually lie between effective support on one hand and an elevated threat of supervisory intervention on the other. New firms experiencing significant growth will be a particular area of focus to ensure that any rapid scaling-up is appropriate and sustainable.
The FCA anticipates that there will be an initial increase in refusal / withdrawal / rejection rates to reflect the higher barrier to entry. It also anticipates a reduction in complaints to the Financial Ombudsman regarding newly-authorised firms in light of these changes.
At the other end of the life-cycle, the FCA is currently conducting a ‘use it or lose it’ review and piloting the removal of firms’ permissions where they are not carrying out the regulated activities to which these relate. The purpose of this exercise is to drive out ‘the halo effect’, or the practice of firms using the regulatory oversight of one activity to add unwarranted credibility to its other, unregulated activities.
The Appointed Representative (AR) regime – under which unauthorised firms carry out certain regulated activities with authorised firms bearing ultimate responsibility for these activities – has come under increasing attention in recent years due to a perceived lack of due diligence and oversight being exercised by the principal firms. The AR system is increasingly viewed as a weak spot in the regulatory perimeter which has allowed regulated activities to be conducted by those who would not meet current, let alone what are likely to be increasing, authorisation standards in their own right with inadequate supervision from their principal firms.
The FCA intends to increase the level of targeted supervision with a focus on ARs in wholesale markets. It also intends to consult later this year on wider, cross-sector changes to strengthen the regime. Significantly, the business plan alludes to the potential need for changes to the applicable legislation - the Financial Markets and Services Act 2000 - to bring about more fundamental changes to the regime. Firms whose business models rely on the AR structure will wish to closely follow developments in this area as a fundamental overhaul of the AR system could be in prospect.
Financial promotions have been a particular area of focus for the regulator following the recently-concluded independent review into its regulation of London Capital & Finance plc. The business plan highlights the measures already taken by the organisation to fast-track its supervisory and enforcement response to breaches of financial promotions rules in light of the findings of the review.
Looking ahead, the FCA intends to consult on its proposed strengthening of the applicable rules and the authorised firms which approve these promotions. It will also work closely with the Treasury in respect of the proposed new legislation which will require authorised firms to pass through a new regulatory gateway prior to approving financial promotions for unauthorised persons, as well as on the proposed extension of financial promotion rules to investment in cryptoassets.
The business plan identifies fraud as one the most important cross-market issues which the FCA intends to address over the coming year. Much of this builds on work already underway and emphasises themes which have been for many years at the heart of the organisation’s anti-fraud strategy: there is therefore a strong sense of ‘more of the same’ in this year’s business plan.
This year’s plan recognises the need for proactive surveillance, triage and intervention and the increasing role played by online platforms in exposing customers to risk from fraudulent or high-risk schemes. It also highlights the FCA’s work with partner agencies to remove fraudsters from within the regulated perimeter, such as its collaboration with the Payment Systems Regulator on Authorised Push Payment fraud.
For more information on any issues raised in this blog post, please contact a member of our FCA Investigation team.
Jill Lorimer is a Partner in our Criminal Litigation team and has an extensive track record in advising firms and individuals facing regulatory and criminal investigations by the Financial Conduct Authority (FCA). Jill has particular expertise in advising firms who are, or who may be, under the scrutiny of the FCA and in taking a proactive approach to head off potentially adverse action. She also advises individuals applying to be FCA approved persons as well as those whose approved status is at risk.
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