FCA outlines top risks posed by different firms
The FCA has released a series of Dear CEO letters to firms. In the letters it outlines the top risks it thinks different sectors potentially pose to consumers, and the actions it expects firms to take.
In the portfolio strategy letter for financial advisers, the regulator highlights the following areas of risk and the steps firms need to take:
- Assessing suitability – The FCA referenced the upcoming Assessing Suitability Review 2. It explained that firms need to ensure the advice you’re providing is suitable, that costs are disclosed early, conflicts of interest are identified then prevented, disclosed and managed, and that you always act in the best interest of clients.
- Define benefit pension transfer advice – The regulator said it’s still concerned about DB pension transfer advice. In the letter it reiterated its position that firms should assume pension transfer is not suitable for your client. It said conflict of interest caused by charging structures, as well as other risks associated with DB transfer business, should be identified and managed. It reminded firms to invest in adequate fact-finding, and that businesses need to have the right advisory, transfer specialist and compliance resource.
- Promotion of mini-bonds ban – The FCA banned the mass marketing of speculative mini- bonds to retail customers, starting on 1st January 2020. It is asking firms to consider if their approval of past financial promotions meet FCA requirements, and to withdraw approval if you find it’s not the case.
- SMCR – SMCR extended to most solo-regulated firms on 9th December 2019. Senior managers and certified staff in your firm should have a clear understanding of their roles and responsibilities, and be appropriately skilled and capable. So, you need to check how the regime affects your people processes and governance.
In the letters addressed to asset managers and alternatives investment firms, the FCA explained that overall standards of governance in the asset management industry largely fails to meet its expectations. It also outlined the following key risks of harm:
- Funds offered to retail investors in the UK don’t consistently offer good value, often due to conflicts of interest. Likewise, alternative investment products offered to retail investors are often unsuitable.
- Lack of investment in technology and operational resilience means systems are not up to scratch and pose a threat to market integrity and data protection.
- In the alternatives market, controls around CASS oversight, market and financial crime are not robust enough.
In the letter addressed to asset managers, the FCA’s supervisory priorities are:
- Liquidity management – This is the responsibility of Authorised Fund Managers (AFMs) to ensure effective liquidity management. Firms should read the recent statements issued by the FCA related to open-ended funds and take action accordingly.
- Firms’ governance and SMCR – Asset managers need to make sure their regulated entities carry out robust decision making, and to prevent harm arising from conflicts of interest between affiliates. SMCR now applies to this sector, so the FCA expects you to improve your approach to governance in line with the regime’s requirements. The regulator will be evaluating firms’ efforts to implement and maintain SMCR throughout the first half of 2020.
- Asset Management Market Study (AMMS) remedies – The FCA will be working to see how well firms are implementing the remedies introduced off the back of the AMMS Final Report include conducting value assessments on firms’ authorised funds.
- Product governance – Asset managers manufacturing UK authorised funds are in scope for the changes brought about by MiFID II, meaning products need to be designed with the best interests of a specified target market in mind. The FCA has started to assess how effectively new product governance provisions have been implemented across the sector, hoping to complete its work in early 2020. At the same time it will also be reviewing how effectively ‘host’ Authorised Corporate Directors (ACDs) undertake their responsibilities, including day-to-day management of a fund.
- LIBOR transition – Firms must plan on the basis that LIBOR will cease from the start of 2022, and must recognise their responsibilities as part of effective transition to more appropriate rates like SONIA.
- Operational resilience – Asset managers rely heavily on technology to operate their business and protect assets. The FCA has prioritised improving operational resilience and will soon publish a full approach to strengthen it throughout financial services. Asset managers who pose a greater risk are now subject to technology reviews. The FCA will contact selected firms to carry out such reviews.
In its letter to alternative investment firms, the FCA’s supervisory priorities are:
- Suitability of investment products – The FCA will be testing whether firms can identify a client’s type, understand their investment needs, knowledge and experience, and market products appropriately.
- CASS oversight – The Client Assets Sourcebook (CASS) ensures the safety of client money and custody assets. Firms with certain permissions will need to demonstrate how they maintain adequate records and are compliant with CASS requirements.
- Market abuse – Firms need to make significant improvement to their market abuse controls if they are to meet MAR obligations and effectively mitigate risk. The FCA has been and continue to conduct questionnaires and site visits to assess firms.
- Market disruption – There is significant risk involved in the alternatives market, including to the wider market. As such the FCA will undertake assessments of firms’ controls, particularly where leverage or other high-risk strategies are employed.
- Financial crime controls – KYC and Customer Due Diligence are particularly important in the alternatives market. Firms should be aware of how they could be used to facilitate financial crime, and the FCA will be reviewing the systems and controls that firms have put in place to mitigate the risks of money laundering and terrorist financing.
FCA continues to probe firms on overdraft rates
Following the FCA’s study into the overdraft market, there have been market reforms to end unreasonably high overdraft charges and fees and reduce harm to vulnerable customers.
But concerns were raised following the release of the new rates by the major banks and building societies. Firms have released similar rates, set at around 40%, prompting the FCA to send a letter requesting more information on how the rates were set and what banks are doing to protect vulnerable customers.
New Interim Chief Executive at FCA
Christopher Woolard, the FCA’s Executive Director of Strategy and Competition, has been appointed as its Interim Chief Executive.
He has been with the FCA since 2013, having taken a lead role in its creation.He is currently responsible for the FCA’s policy output and for leading the regulator’s work around innovation and competition, while also acting as an Executive member of the board.
Woolard is replacing Andrew Bailey, who departs in March 2020 to become Governor of the Bank of England.
Saying goodbye to LIBOR: Actions for firms in 2020
The regulator, the Bank of England and the Working Group on Sterling Risk-Free Reference Rate (RFRWG) have said that firms need to do more to make sure they’re prepared for LIBOR coming to an end.
The RFRWG shared priorities and a plan of the coming year, including actions that organisations need to take to reduce LIBOR exposure and move to alternative rates.
Among those actions are:
- To stop issuing cash products linked to LIBOR by the end of Q3 2020.
- To make efforts, throughout 2020, to demonstrate that compounded SONIA is easily accessible and usable.
- To take steps to enable more volumes to be shifted from LIBOR to SONIA in derivative markets.
- To plan the transition of legacy LIBOR products to reduce the stock of LIBOR referencing contracts by Q1 2021.
- To consider how to address issues with ‘tough legacy’ contracts.
The Bank of England and the FCA have also taken action, sending a joint letter to major banks and insurers in the UK. The letter explains what the Bank and the regulator expect firms to do in 2020, including the actions set out by the RFRWG, and that such actions will be closely monitored by the Bank’s Financial Policy Committee (FPC).
In a statement, the Bank of England and the FCA also encouraged market makers to switch the convention for sterling interest rate swaps from LIBOR to SONIA by Monday 2nd March 2020.
FCA and BoE refresh data strategy
The FCA and Bank of England have published a refreshed data strategy and discussion paper respectively. The publications signal a renewed focus on the use of data to streamline regulatory operations, better understand the market and respond to firm-level issues.
Outlined in its new strategy, the FCA’s top priorities include:
- Developing in-house skills and capabilities around data and data analytics
- Investing in new technology like web scraping, network analytics and natural language processing
- Reviewing risk and control frameworks to make sure new tools and technologies are rolled out safely
- Streamlining the data collection process to improve quality
- Investigating ways that data, automation and other technologies can reduce the burden on firms and improve efficiency in FCA regulation.
Meanwhile, the BoE’s discussion paper focusses on data collection and what the Bank can do to make data analysis more efficient for itself and for regulated firms.
The Bank is looking for industry views on its proposed approach, which include:
- Agreeing on defined data points and industry standards as a basis for reports
- Modernising reporting instructions by using standardised language and other tactics that will make instructions easier to use
- Architecture and governance changes, such as using APIs to automatically pull firm level data and centralised some specific reporting processes.
Responses should be sent to DatacollectionDP@bankofengland.co.uk before 7th April.
Improving competition to address the loyalty penalty
In 2018, Citizens Advice raised a super-complaint with the Competition and Markets Authority (CMA) over the loyalty penalty – where competition has stalled and longstanding customers who are unlikely to switch providers are charged more than new customers for the same services. The FCA has recently published an update on the steps it is taking to improve competition across the cash savings, home insurance and mortgage markets.
- Cash savings
The FCA has published a consultation paper outlining its proposals on how to improve competition in the easy access cash savings market. These include:
- Allowing for higher introductory for new customers, for up to 12 months
- After that, firms would set a single interest rate on easy access cash savings accounts and on easy access cash ISAs
- Requiring firms to publish data on the interest rates they set, making it easier for consumers and intermediaries to understand the market
The consultation is open until 9th April.
- Home and motor insurance
The FCA’s interim market study report on pricing practices in the GI market, published in October 2019, reaffirmed the CMA’s finding that the home insurance market was not working for consumers. Complex pricing practices often lead to higher prices and premiums for customer who renew.
The regulator is considering a number of industry-wide reforms such as tackling high premiums, making it easier to switch providers and benefiting from innovations like Open Finance. The final report is due in Q1 2020, which will outline the FCA’s proposals more specifically.
In October 2019, the FCA made changes to the responsible lending rules to free ‘mortgage prisoners’ – customers who are up-to-date with their mortgage payments but are denied a more affordable mortgage.
The regulator will also be publishing new rules on mortgage advice and selling standards in Q1 2020, following a consultation in last year. Proposed changes included:
- Amending guidance around what qualifies as ‘advice’, allowing for the development of more tools that help customers choose and buy a mortgage
- Making execution-only sales channels easier to use
- Require advisers to better explain their rationale if customers were recommended a mortgage that is not the cheapest deal.
Regulating the cryptoasset market
The FCA is now supervising UK businesses that conduct certain cryptoasset activities, because of the risks around money laundering and terrorist financing. Firms will be expected to:
- Register with the FCA before January 2021. The deadline for applying is June 2020.
- Assess the money laundering and terrorist financing risks, and create appropriate policies, systems and controls to manage them.
- Make sure that customer due diligence and transaction monitoring is robust, using enhanced due diligence where necessary