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UK Financial Regulator Business Plan: Key Findings and Potential Enforcement Areas

The logo of the new Financial Conduct Authority can be seen at the agency’s headquarters in London’s Canary Wharf business district. REUTERS / Chris Helgren

August 24, 2021 – The UK’s Financial Conduct Authority (FCA) has published its business plan for 2021/2022. The FCA is the UK’s primary financial regulator responsible for protecting consumers, supporting competition in financial services and maintaining market integrity.

The business plan sets out the regulator’s priorities for the coming fiscal year (and beyond), so it is an important indication of the future priorities and directions of the FCA. This year’s plan follows a year in which the regulator has focused on dealing with the immediate effects of the COVID-19 pandemic on financial services (specifically by submitting their business interruption insurance test case).

The FCA, like financial regulators around the world, has increased its focus on sustainability and ESG – especially climate change – given the central role of financial services companies in allocating capital and the regulatory risks that climate change brings. This year’s business plan signals an ongoing shift from ESG governance, controls and disclosures, which are nice-to-have, to tough regulatory expectations.

For example, the FCA points out that it introduced a new listing rule in January 2021 following recommendations from the Task Force on Climate-Related Financial Disclosures, an organization established by the Financial Stability Board in 2015 to improve reporting on climate-related financial information Has. The new regulation requires companies with a premium listing in the UK, among other things, to disclose in their annual financial report the climate-related risks and opportunities that the respective organization has identified in the short, medium and long term.

In the business plan, the FCA confirms that it is advising the expansion of these new disclosure requirements to include asset managers, life insurers and pension funds regulated by the FCA and that it intends to put the new regulations into effect from January 1, 2022.

In addition, the regulator will increase its regulatory focus on whether asset managers market the ESG characteristics of funds in a fair, clear and not misleading way. ESG and sustainable mutual funds are currently the fastest growing segment of the European fund market and consumers place a high value on ESG-related investment opportunities.

The business plan is next to the guidelines published on July 19, 2021 for the Chairs of Approved Fund Managers, which set out the FCA’s expectations for the design, provision and disclosure of ESG and sustainable investment funds. The overarching principle of the guidelines is that the ESG and / or sustainability focus of a fund should be consistently reflected in its design, provision and disclosure (including its name, stated objectives, documented investment policy and strategy and its holdings). This is part of a broader FCA focus to ensure that asset managers market investment products in a fair, clear and not misleading manner.

The FCA will increasingly and continuously challenge companies to ensure that companies provide accurate and thoughtful information about ESG products, services and strategies to consumers and the marketplace. In its guidance, the regulator highlighted recent regulatory filings that fell short of expectations, including a fund allegedly marketing itself as an investment in companies that it describes as “contributing to the positive environmental impact” that were not apparent that any of the companies in question actually did so. We are already seeing increased investor and regulatory expectations in this area leading to an increase in ESG-related litigation, and we expect this trend to continue.

The FCA is also committed to improving the diversity and inclusion of its own workforce and the financial services sector in general. It highlights a recent discussion paper with the Bank of England in which regulators set out their plans to accelerate the pace of major changes in diversity and inclusion in the financial sector as a whole. They intend to conduct a voluntary pilot data collection later this year in which they will ask companies to provide aggregated data on some or all of the nine protected traits under the 2010 Gender Equality Act (including race and gender) and socio-economic background, for their entire workforce (and not only for the most senior employees). The proposals stipulate that all companies must submit this type of data (currently largely voluntarily), albeit on a proportional basis.

While the FCA has long focused on vulnerable customers (and underpinned by its legal goal of consumer protection), the issue has moved more into focus with the ongoing pandemic and its impact on household finances. The business plan focuses on consumer protection.

At a high level, the plan signals a more aggressive and confident approach to corporate misconduct, with the regulator noting that it intends to create a more robust admissions portal for new companies, provide stronger oversight for newly admitted companies, and use innovative data – Driven approaches to preventing and eliminating misconduct (e.g. social media monitoring to identify and raise awareness of new types of investment fraud).

As part of its specific work program, the regulator continues to consult proposals for a new consumer tax that would oblige businesses in retail markets to wonder what outcomes their customers can expect from their products and services and act to enable those outcomes instead of them hinder.

The proposed changes could, for example, require businesses to make it easier for consumers to understand the financial information made available to them by actively anticipating where consumers may misunderstand and structuring information in a way that prevents the exploitation of behavioral bias. In its consultation, the FCA cited the example of banks issuing notices encouraging consumers to focus on the daily cost of an overdraft (which appeared minor) rather than the substantial cumulative cost of borrowing. In the regulator’s view, such communications were structured in a way that exploited consumer short-term thinking to prevent them from making a rational and fully informed choice. The FCA intends for the consumer tax to put an end to these practices and it is clear that the regulator sees duty as a potentially important pillar of its future enforcement strategy.

The past year has seen a variety of regulatory guidelines and requirements related to operational resilience and outsourcing. In March 2021, the FCA released its long-awaited policy statement on operational resilience. It lays down several far-reaching requirements, including, for example, the emphasis on “impact tolerances” (the maximum tolerable amount of interruptions for a major business service) that requires the use of mapping exercises to prepare “impact tolerances” for critical business services and testing such ” Impact tolerances ”through failure scenarios.

The FCA confirms in the business plan that it expects companies to implement these requirements, that in 2021/2022 it will assess the progress made by companies in implementing these new requirements and identify areas for improvement, March 2025, assess companies’ ability to stay within their “impact tolerances”. After a brief pause, during which it mainly focused on the financial impact of the pandemic, we expect the FCA to return to operational resilience as a priority area in the years to come.

Given the priorities set by the FCA, we believe that the FCA is likely to focus its thematic oversight and enforcement activities on several areas in the years to come:

• First, as mentioned earlier, the regulator will closely monitor that companies are properly implementing their operational resilience requirements.

• Second, we expect that the regulator will try to use some of the new tools at its disposal (e.g. also with regard to ESG-related products) or to exploit consumer behavioral biases.

• Third, in relation to the wholesale market, we expect the regulator to step up its enforcement action against market disruptive misconduct.

With this business plan, the FCA has signaled its intention to take a more assertive and interventionist role in the financial services markets, and companies should expect increased regulatory encroachment and challenges in the FCA’s focus areas.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which are committed to integrity, independence and bias under the trust principles. Westlaw Today is owned by Thomson Reuters and operates independently from Reuters News.

Christopher Robinson

Christopher Robinson is a partner in the dispute resolution practice at Freshfields and head of the firm’s London financial dispute practice. He advises on a variety of litigation and investigations in the banking and financial services sector and can be reached at [email protected]

Piers Reynolds

Piers Reynolds is a partner in the Dispute Resolution Practice at Freshfields, based in London. He has experience advising banks, insurance companies and other financial institutions on financial disputes and regulatory investigations. He can be reached at [email protected]

Charles Mondelli

Charles Mondelli is an associate in the Dispute Resolution Practice at Freshfields, based in London. He can be reached at [email protected]

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