What’s on the regulatory horizon?
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If there’s one issue that dominated the regulatory landscape in 2019, it was Brexit. With every deadline that came and went, and the possibility of a no-deal exit becoming all the more real, it’s proved one of the most immediate challenges for the regulator.
Main developments in 2019 included:
- Legislation and Temporary Transitional Power
The FCA, together with the Treasury and the Bank of England, has been working to make sure that EU financial services legislation is on-shored by the exit date. There have been various alterations to the Handbook and over 50 legislative changes to achieve this. No need to panic though – the FCA has confirmed they will provide a one-year transitional relief period for firms to meet any regulatory obligations that come from on-shoring.
- New co-operation agreements
Co-operation agreements have been established with the EU markets, insurance and banking authorities. They’ll come into effect in the case of a no-deal, but affected firms should be aware that they are only temporary and certainly don’t amount to long-term access to EU markets.
With the new date for leaving the EU just around the corner, there’s still a lot of uncertainty around what will be the Brexit outcome. In the event of a no-deal exit, the FCA’s precautionary measures will come into play and it’s unlikely that regulated activities passported into the UK will be affected for the time being. But, there’ll be plenty more work to do before we see greater clarity on EU access in the long run.
If we go ahead with the Withdrawal Agreement in its current form, we’ll move into a transition period and the focus will shift towards agreeing on a form of equivalence or new agreement between regulatory regimes before the end of 2020.
In either scenario, the FCA will see its resources further squeezed as it navigates Brexit and establishes what UK regulation will look like outside the EU.
Suitability of DB transfer advice
Following the regulator’s findings in December of 2018 that, having reviewed files and visited a sample of firms, less than 50% of advice was suitable, the stage was set for a year of unprecedented scrutiny into DB transfer advice throughout the industry.
The headline-grabbing developments hit a high in June, when the FCA released findings from its research into the size and value of the DB pensions transfer market. It concluded that the advice it had seen was “still not of an acceptable standard”.
The statistics are familiar to most by now. The FCA found that 69% of clients receiving advice on DB pension transfers were recommended to transfer. The figure stood in stark contrast to the FCA’s assertion that transfers are unlikely to be suitable for the majority of clients.
The fallout continued throughout the rest of the year. From July to October the FCA announced it was consulting on a ban on contingent charging for most DB transfers. As of the end of 2019 we’re still waiting on the outcome of that consultation.
Then in October 2019 the news came that the regulator was contacting 1,600 to 1,700 firms, telling them to take action over their DB transfer business. Firms who didn’t act, we heard, were to be targeted by further steps.
Even if you’re not one of the 1,700 firms who’ve been contacted, you should still check you can evidence the measures you’ve taken to make sure your transfer advice is suitable for clients.
Simply put, you can’t afford to rest on your laurels.”
If you’re thinking about your DB pensions transfer advice, we conduct the most file reviews in the market. We know what good looks like and what the FCA expects. In addition to reviewing your files, we can conduct a health check of your sales process for DB transfers to make sure it is robust.
The deadline to implement the extension of SMCR to nearly all regulated firms has now past, but we expect the FCA to continue pushing for cultural transformation in 2020. SMCR is a huge part of that, with the focus now switching to enforcing the regime as business as usual. All firms need to be working to properly embed the new conduct rules company-wide and should be prepared to have their plans and practices scrutinised by the FCA. By 9th December 2020, you’ll need to have trained all relevant staff on conduct rules and how individual job roles are impacted. This date will come around quicker than you think, so get started now.
Beyond that, the regulator is also consulting on the extension of the senior managers’ regime and conduct rules to benchmark administrators. Following a report from the House of Commons Treasury Committee on IT failures in the industry, there’ve also been murmurs about extending SMCR to key areas of the wider market infrastructure, like payment system operators.
Clearly, conduct risk and its cultural drivers remain high on the agenda for 2020, and you’ll need to start thinking about how your internal culture aligns with FCA expectations around SMCR. Doing a full culture and conduct risk assessment of your business can shine a light on what you’re doing well, and what you still need to work on.
Keen to improve the culture of your business but not sure where to start? Head to our insights page for expert guidance on how you can create a healthy culture.Find out more
The Retail Distribution Review (RDR) and the Financial Advice Markets Review (FAMR) aimed to improve customer outcomes and value for money across the advice market, but neither have quite delivered the results hoped for. In May, the FCA launched its planned post-implementation review by asking the advice industry for feedback. But last month the publication date for the final report was pushed back to the latter half of 2020 – not that much of a shock, given the FCA’s other priorities this year.
Whatever action the regulator takes off the back of its findings, it will likely have a widespread and significant impact on charging models. We’ll be keeping an eye on developments, but to get ahead you should start reviewing your business model now. Consider the value for money that your current model offers and how you can innovate to better serve your clients.
Operational resilience was listed as a top priority in the 2019/20 Business Plan. Following the launch of joint consultation papers by the FCA, PRA and BoE at the tail end of 2019, it also looks set to be a key issue next year too. Hardly surprising, given the growing cyber threat and huge potential for consumer harm when financial systems are disrupted.
The consultation is open until 3rd April, with final policies due to be published in Q3. What’s more, it’s likely that the FCA will continue with its CBEST stress testing work throughout 2020. You should already have started thinking about your frameworks for risk management and operational resilience, but you need to step up activity in 2020 by defining objectives and undertaking gap analysis.
Our top tips:
- Do a thorough audit of current assets and systems
- Consider the role of culture
- Implement effective controls and impact tolerances, and stress test them. Then test them again.
- Monitor key risks and periodically review your processes.
We can help you enhance your operational resilience. Read our paper for more tips from our experts, or give us a call.
Sustainability will start to climb the agenda this year. In the EU, firms that sell financial products will soon be subject to targets for sustainable investments and new rules for disclosure, allowing their clients to better assess the environmental and social impact of their investments.
Closer to home, the FCA continues its own work around climate change and green finance, including new requirements for firms to report on their environmental, social and governance policies. In early 2020, it’ll also be launching a consultation on new and existing disclosure rules around climate change risks.
The industry continues to be shaped by technological change. And with innovation remaining a top priority for the FCA this year, it shows no signs of slowing down. But it’s about much more than just keeping up with the pace of change. In the face of an ever-evolving tech landscape, regulation is transforming too. Is your business ready for the regulatory future?
Cyber security and the use of data are both issues that never stray far from the FCA’s thoughts. Firms need to make sure their IT security and data protection controls are up to scratch. Last month, the FCA launched its consultation on operational resilience, which outlined how firms can make sure their key business functions and systems are resilient against ongoing cyber threats, and what action will be expected of firms in the future.
While all this might sound like more hard work, there’s also huge scope for firms to use tech to their advantage and reduce their compliance costs. The growing ecosystem of RegTech presents an opportunity to streamline and automate many of the manual processes that make compliance such a burden, helping you to cut costs and inefficiencies while improving the quality of oversight. Our advice? Start embracing it now to get ahead.
Your systems will fail. So, what can you do about it? How to protect your customers through operational resilience.Find out more