our eye on the FCA Risk outlook & business plan

Transcription

1 our eye on the FCA Risk outlook & business plan An essential summary of the FCA s 2014 Risk Outlook and Business Plan. Providing guidance on what to keep your eye on over the coming year April 2014

2 Introduction April 2014 sees the first anniversary of the Financial Conduct Authority s (FCA) regulatory tenure, and with it, their second Risk Outlook and Business plan, which sets out their plans for the upcoming twelve months. Whilst the regulator has had a busy and active preceding year, there is no sign of an abating appetite in their desire to improve the financial services experience of consumers and to achieve their statutory objectives of: Protecting the consumer Enhancing market integrity Promoting effective competition In order to achieve these objectives, the regulator has been keen to point out that their approach to regulation differs from that of their predecessor and that they will continue to be forward looking and pre-emptive, using their interventionist powers to full effect. A change of approach Since inception, the FCA s emphasis has focused on culture. Firms should be ensuring that good consumer outcomes and market integrity are at the heart of their business; the focus needs to be on how the business is run, not how it is controlled, which is a fundamental change of approach. A firm s culture and business model should not allow profits to be made at the expense of the consumer. If necessary, firms should change their culture and overhaul their business model. Profits should be good profits not profit that will eventually need to be repaid to the consumer in the form of redress. The FCA believes that the rebuilding of trust between the regulator and the regulated will provide the greatest chance of alignment to achieve better results. Share this Our eye on the FCA Risk Outlook and Business Plan

3 Expanding scope As well as continuing much of their existing work, the FCA s regulatory scope is expanding, with some new high profile additions to their remit featuring high on their agenda: Consumer Credit The FCA plans to use their rules and actions to raise standards and protect the consumer; Banking Standards The FCA will work closely with the Prudential Regulation Authority (PRA) to implement the new banking reform legislation, including a Senior Management and Certified Persons regime; Risks to financial markets The FCA looks at the causes of risk - the drivers as well as evolving risks - and assesses how these affect firms and consumers alike. Drivers of risk and evolving risk are broken down into further sub-categories and the FCA has identified seven areas that they believe to be of considerable importance, which will form the basis of their work over the coming months. The diagram on the following pages provides an at-aglance overview of the of the FCA s risk outlook and the key issues currently facing financial markets. UK Payment Systems 2015 will see the launch of a new regulator, which although a separate legal entity, will sit under the FCA. This paper explores the FCA s key themes for the coming 12 months and their planned activity for 2014/15. Our eye on the FCA Risk Outlook and Business Plan

4 key issues facing financial markets Drivers of Risk evolving risk landscape Underlying Drivers of Risk Environmental Developments Cross Market Pressures and Related Risks 7 Forward Looking Areas of Focus Information mismatch and lack of financial capability may lead to poor decision making processes Economic and Market Environment Effects of employment, economic growth, low interest rates Misalignment of Expectations with Underlying Fundamentals Could lead to inappropriate decisions based on ill-informed risk assessments. Consumers may be more likely to invest in riskier products in search for higher yields in a low-interest environment 1 Technological developments may outstrip firms investment, consumer capabilities & regulatory response Could result in firms misallocation of investment in technology, an over-reliance on third parties, and an increase in financial crime. New entrants may be able to take advantage of new technologies which may alter the competitive landscape Technological Developments 2 Poor culture and controls continue to threaten market integrity Inherent Factors Structures and Business Conduct Conflicts of interest, culture and incentives and illdefined market structures can drive poor behaviours that lead to poor consumer outcomes May create effective and cost effective distribution channels, but may be limited by vulnerabilities in the design and management of systems. Increased availability of data may increase potential for cybercrime Policy and Regulatory Environment Brings about changes to structure of markets and the financial sector which can impact on firms performance e.g.: RDR MMR NMPIs Banking Reform Pressure of Business Model Sustainability and Strategies Firms may adopt strategies to the detriment of consumer outcomes Pressure to Balance Financial Goals with Good Consumer Outcomes Implications of any short-term cost-cutting strategies may not be in the best interests of consumers Culture is a crucial driver of poor outcomes Large back-books May lead firms to act against their existing customers best interests in order to attract new customers Retirement income products and distribution may deliver poor consumer outcomes Products may be developed that are not in the best interests of consumers and disclosure requirements can be compromised by product complexity The growth of consumer credit may lead to unaffordable debt Consumers are put at risk with high cost short term credit and poor debt management 6 Terms and conditions may be excessively complex Leading to high levels of consumer misunderstanding and difficulties in comparing different products 7 House price growth that is substantial and rapid may give rise to conduct issues With demand for housing rising, house prices could rise relative to incomes and rent, meaning consumers could take on additional levels of debt to extract equity or buy homes. Our eye on the FCA Risk Outlook and Business Plan

5 Thematic work and market studies Using their risk based approach, the FCA will be proactively supervising firms to ensure that they embedded a culture that promotes the fair treatment of customers and market integrity. There will be a particular focus on the robustness of firms governance, risk management processes, monitoring of sales practices and market abuse controls. Very close attention will be paid to how firms are running their business and generating their profit; to ensure that this is not to the detriment of the consumer. Market studies are used to analyse competition and weaknesses in markets, and the 2014 focus will be on: wholesale markets; parts of the consumer credit market, including credit cards; Thematic reviews are part of event driven work on sectors/products that may put customers at risk. This year there is a particular focus on: treatment of customers in life insurance; consumer credit; benchmarks. Key activities 2014 The FCA has split their work into five sector categories for wholesale and retail firms, and within each they have outlined the key topics that will come under increased scrutiny by way of thematic reviews and market studies. Below is a snapshot of the topics within each sector, as well as a schedule showing the plans for completion of study into cash savings accounts; completion of study into income products at retirement. Retail Banking Unauthorised transactions Packaged bank accounts The impact of cost cutting initiatives on different consumer groups Long term savings and pensions Effective due diligence for retail investment advice Sales practices at retirement Fair treatment of long-standing customers in life insurance Governance of with-profit funds Use of in-house funds in wealth management firms Risk at client take-on in contract for difference providers Share this Our eye on the FCA Risk Outlook and Business Plan

6 Mortgage and consumer lending Forbearance practices and the treatment of customers in arrears in the high-cost short-term lending market Suitability of advice in debt management firms Mortgage Market Review (MMR) post implementation testing Hybrid equity release products Maturity of interest-only mortgages Governance over mortgage lending strategies General Insurance and protection Commercial claims Cover holders Premium finance Motor legal expenses insurance Mobile phone insurance Protection of client money by small firms Wholesale banking and investment management Conflicts of interest in investment banks Controls over flows of information in investment banks Market abuse controls in asset managers Trader controls around benchmarks Agency responsibilities of asset managers Other/cross sector Managing the performance of staff Resilience against cyber attack Visibility of IT resilience and risks at board level Our eye on the FCA Risk Outlook and Business Plan

7 CALENDER OF Thematic work and market studies Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Cash savings Retail Banking The impact of cost-cutting on consumer groups Unauthorised transactions Packaged bank accounts Pension reform Retirement income study (inc. sales practices) Advice models MiFID II Long-term Savings & Pensions In-house funds in wealth management firms Risks at client take-on in CFD providers Simplifying disclosure Fair treatment of long-standing customers in life insurance RDR post-implementation review Effective due diligence for retail investment advice Governance of with profit funds High-cost short-term credit inc. treatment of customers in arrears Governance over mortgage lending strategies Fairness in changes to mortgage contract terms DP Mortgages & Consumer Lending Maturity of interest-only mortgages MMR post-implementation review & testing Regulated covered bonds 2nd line Suitability of advice in debt management firms Consumer credit - credit cards Hybrid equity release products Our eye on the FCA Risk Outlook and Business Plan

8 CALENDER OF Thematic work and market studies Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 GI Add-Ons General Insurance & Protection Cover holders Premium finance MLEI Commercial Claims Protection of client money by small firms Mobile Phone Insurance Wholesale sector competition review and market study Pension fund charges Wholesale Banking & Investment Management Market abuse controls in asset managers Controls over information flows in invest. banks Agency responsibilities of asset managers Conflicts of Interest in investment banks Trader controls around benchmarks Other/ X-Sector Financial crime controls in C3 & C4 firms Visability of resilience and risks at board level Managing the performance of staff Our eye on the FCA Risk Outlook and Business Plan

9 Reviews and consultations There will also be the ongoing work of reviews and consultations, where the regulator produces and develops regulation and policies across the financial services markets, including a plethora of legislation from Europe that requires UK implementation. An important part of the regulator s work is assessing the impact and effect of their regulation. Their plans for 2014 include: Analysis of consumer complaints about PPI A post implementation review of RDR to assess the effect against objectives; Implementation of MMR; Action for firms Over the coming months, TCC will be producing a series of papers which explore some of the key topics and issues in more detail. In the meantime, firms need to acquaint themselves with the key messages from the regulator and assess the relevance to their own business models and strategies. They should look at their business models and strategy to assess whether they are effectively identifying and managing the root causes and drivers of risk. Placing the consumer and the integrity of the markets and the heart of their business is fundamental to successfully navigating a path through FCA regulation and compliance. Embedding of EU policy AIFMD, MiFID 2; Continuing assessment of AML processes and controls in major banks; Consultation on long stop of 15 years on FOS complaints Share this Our eye on the FCA Risk Outlook and Business Plan

10 Head Office The Consulting Consortium Ltd 23 Austin Frairs London EC2N 2QP Tel: +44 (0) Fax: +44 (0) UK Operations Centre The Consulting Consortium Ltd 1 Broadgate The Headrow Leeds West Yorkshire LS1 8EQ Tel: +44 (0) Fax: +44 (0) This document was produced by The Consulting Consortium Ltd 2014